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The landscape of the financial markets is undergoing a significant transformation as we step into the year 2024. One notable development is the reversal of the EUR/USD rebound that marked the beginning of the year. My projections suggest a continued underperformance of this currency pair in the coming months, with a potential descent towards 1.07 in the next 2 months. The intricate interplay of various currency drivers is anticipated to contribute to this downward trajectory, primarily influenced by the relative policy outlook between the European Central Bank (ECB) and the Federal Reserve (Fed). (that I’ve covered on my webinar last week)
As we delve into the ECB and the Fed, few economists from Credit Agricole foresee rate cuts from both institutions in mid-2024. However, the Governing Council of the ECB is expected to take a more aggressive easing stance, thereby exerting further downward pressure on the EUR/USD. Additionally, historical patterns indicate that growing risk aversion during past US recessions has weighed on the EUR/USD, and the potential risk of a Trump presidency looms large, intensifying fears of a global trade war.
The EUR faces additional vulnerabilities in the form of a possible widening of peripheral yield spreads to Bunds. Dovish Fed rate cut expectations have already diminished the appeal of the USD, though the extent of easing anticipated by the markets may be more optimistic than what the Fed is likely to deliver. This leads us to believe that the USD, currently considered oversold, may experience a consolidation as investors reassess their dovish outlook.
Looking ahead, the USD's performance is expected to hinge on two key drivers in 2024. Firstly, the spectre of US recession risks and escalating tariff concerns in the lead-up to the presidential election may prompt a late-year recovery for the USD. Secondly, the Swiss Franc's (CHF) exceptional performance in 2023, driven by interventions from the Swiss National Bank (SNB), is expected to plateau in 2024. While remaining neutral on the CHF for the year, I remain vigilant for any resurgence in market jitters that could impact its trajectory in 2025.
Persistent US inflation, fuelled by sticky services inflation, is poised to delay Fed rate cuts until Q324, and even then, the cuts may be limited. This scenario could contribute to a rally in USD/JPY in the near term, as we’re all seeing this happening now, fuelled by repatriation flows from US Treasuries back into Japanese Government Bonds (JGBs). Geopolitical uncertainties also add an element of volatility to JPY crosses, potentially strengthening the Japanese Yen.
The spectre of a Trump victory in the US presidential election introduces the threat of tariffs on US imports, although the approval process could impede these efforts. Any broad tariffs imposed could trigger a global tax on international trade, favouring the USD against the JPY due to Japan's lower trade dependency. Meanwhile, the GBP stands to benefit from a convergence of factors, including the UK's weak economic outlook, potential Labour Party resurgence, and a policy shift towards EU collaboration post-Brexit.
USD/CAD is expected to maintain its narrow range-trading pattern, leaning towards a challenge of its lower bound. Despite unwinding stretched CAD shorts, market pricing appears incongruent with past easing experiences, creating a unique landscape for the pair.
After a two-year downtrend, AUD/USD seems poised for a turnaround. The short-term rates differential has bottomed out, and a mild US recession is anticipated. Australian inflation resilience and China's growth stabilization further contribute to the positive outlook for Australian exports.
In contrast, the Reserve Bank of New Zealand (RBNZ) is perceived as overly hawkish. Global growth slowdown, coupled with a conservative government's spending cuts, is expected to weigh on New Zealand's economy and the NZD. External factors such as El Nino also pose significant challenges.
Despite a recovery in H2 2023, the Norwegian Krone (NOK) remains undervalued within the G10 space. The potential for a more reflective valuation of its solid domestic fundamentals is anticipated in 2025. The Swedish Krona (SEK), on the other hand, experienced a turnaround but may face headwinds in 2024 as the Riksbank's FX reserves' hedging program nears completion.
Gold (XAU) continues to assert itself as the ultimate hedge against risk aversion and currency debasement, with its shine expected to intensify, particularly when the Fed initiates rate cuts in H2 2024.
Some of the information from this research has been collected from Credit Agricole and their analysts.
This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.
