Soc Gen economics expects the upswing in global inflation we have seen in recent months to persist. A turn higher in inflation will not affect all countries equally, and will consequently have different impacts on currencies. Higher inflation is theoretically negative for a currency, but the real world impact depends on the central bank's reaction function to rising inflation. A central bank that reacts quickly to higher inflation pressures by tightening monetary policy will drive the currency higher in tandem with inflation.
According to Societe Generale:
Canadian dollar stands to gain the most from a global inflation uptrend, assuming that the Bank of Canada will pursue a strict inflation targeting agenda. Other currencies that could also gain are the AUD, NOK and USD. Among these four currencies that are most likely to gain from an inflation revival, we are least confident about the Norwegian krone given the demonstrated weak currency bias of the Norges Bank.
Conversely, the EUR, JPY, CHF and NZD are deemed the least likely to benefit from higher global inflation pressures. We would recommend leaving the Swiss franc out of the basket because SNB policy uncertainty is too high, and the euro already is highly correlated to the franc.
