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15 Dec 2023

15 Dec 2023

China’s growth engines are powering up.

China’s trajectory will be an important driver of foreign exchange and broader asset markets over 2024. After the economy suffered some renewed weakness when the COVID-zero policies were rolled back, policymakers in China stepped up their efforts to re-invigorate activity, and there are signs momentum has bottomed out. On top of the monetary easing that has been put through, and the efforts to support the renminbi, targeted fiscal measures have also been unveiled, along with a raft of policies aimed at brightening the outlook in the beleaguered property sector. USDCNY daily fix vs. survey estimate Taken individually, the measures don’t...

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15 Dec 2023

Policy divergences are emerging.

The re-acceleration in momentum in China that we are envisaging should have positive spillovers into regional growth, emerging market assets, and Australia’s terms of trade, all of which have a positive correlation with the exchange rate. The currency could stage a more powerful rally if China’s economic revival proves to be more robust and commodity-intensive than anticipated. AUDUSD vs. USDCNH Another bullish setting could emerge if domestic macro conditions prompt a prolonged hawkish stance from the Reserve Bank of Australia. This could see relative interest rate expectations -which weighed down the Australian dollar over most of 2022 and 2023 due...

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15 Dec 2023

Real rates could remain relatively restrictive.

Given the significant progress seen thus far, it would take a meaningful re-acceleration in price growth to motivate additional interest rate hikes in major economies, and a deep downturn could force central banks into delivering the easing currently priced into markets. But because inflation has fallen in line with policy expectations, real interest rates remain elevated, and could ultimately settle well above pre-pandemic levels as the world grapples with changing demographics, geopolitical uncertainties, extraordinary levels of indebtedness, deepening capital scarcity, and higher long-term volatility risks. For households, businesses, and governments, the extremely demand-stimulative borrowing environment that prevailed for more than...

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15 Dec 2023

The pound could outperform low expectations.

Our outlook for the pound is bifurcated. As it becomes clear that post-pandemic price dynamics are not reflective of a post-Brexit structural break, and are instead simply lagging those seen on the Continent, we expect the exchange rate to fall in line with relative rate differentials. A pullback to sub-1.25 levels is not beyond the realm of possibility in the first quarter. But in the longer term, we think underlying economic resilience could keep yield differentials surprisingly well supported. According to recent data revisions, the British economy managed to outperform both France and Germany through much of the post-pandemic period,...

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15 Dec 2023

The dollar might defy bearish forecasts.

We are directionally aligned with consensus – like most observers, we believe the greenback will ultimately weaken in 2024 – but we think its descent will be more turbulent than others expect. A number of factors could upset prevailing views: If markets begin questioning the soft landing thesis in earnest, “dollar smile” dynamics could see capital flows re-routed back into US financial markets, triggering a sustained rally in the greenback. Signs of stubbornly sticky inflation might drive a reappraisal across developed-market yield curves, weighing on high-beta currencies. A stimulus-led acceleration in China could lift commodity benchmarks and impact price expectations...

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