Q1 2024 Global Currency and Macroeconomic Outlook

• We expect US growth to slow (sitting comfortably below potential) as the economy digests a fading fiscal impulse and
tighter credit conditions

• We expect inflation to fall via shelter and core goods but the pace of underlying core service disinflation to slow

• We see the Fed cutting rates next year as inflation falls and the labour market softens. However, with core inflation above target
and the labour market still tight, we see little urgency for the Fed to cut rates quickly and pencil in three cuts for next year from
May (at a pace of every other meeting). We see some evidence that the neutral rate has moved higher in the US (we assume
3% for the terminal rate in the US)

• We expect continued stagnation in Europe as monetary policy continues to bite, but supply shocks fade. This should help
disinflation continue and points to a further slowing in the labour market. We expect the ECB to begin cutting rates in April and
see risks that they have already overtightened policy. We potentially see the first cut from the Bank of England in August.

• We see progress in Japanese “reflation” and expect Japan to exit yield curve control. We pencil in April for the end of NIRP as
Shunto comes into view.

• We continue to have a pessimistic structural view on China given various headwinds and while there has been some policy support, we still expect growth to slow next year. Monetary policy should retain a small easing bias

• Investors have become more confident about the speed of disinflation. The fall in
global bond yields have helped risk assets perform strongly and the dollar depreciate

• Our view is to pare back dollar shorts here (DXY +). This reflects three main economic
views: Firstly, we see too many cuts being priced in for the Fed next year. Secondly, we
see the conviction that the rate cutting cycle will only be driven by lower inflation
(versus lower growth) as being too high. Thirdly, the outlook for Europe and China, is still weak.

• Softer US growth should somewhat limit the rise of US yields, but the Fed cutting as a
consequence of lower inflation and slower growth should be negative for risk assets,
including equities and commodities. This ultimately reflects slowing global demand
because of tighter monetary policy as the fiscal impulse fades.

• Our view that equities are too optimistic on growth points to a more difficult
environment for G10 cyclical FX such as AUD (-), CAD (-) and NOK (-) which have been given a boost from the optimism that the Fed will cut quickly driven by inflation.

• We keep the European complex (GBP, EUR and CHF) negative (-). As we expected,
faster cutting cycles have now been priced in Europe. We agree with ECB pricing but
see further scope for this to happen in the UK. For the SNB, our view reflects the nod to a change in their approach to the currency (less in favour of FX strength).

• We had flagged that the risk-reward was long yen and after large move, we are
neutral JPY (0). Though we see hawkish risks from the BoJ, we see larger immediate
risks to US yields. More medium term, our view that the conviction of “higher for
longer” should be eroded – is generally good for the yen.

• Our near-term concern around US yields make EM FX more vulnerable- we downgrade BRL (0) to neutral, given risk reward and uncertain fiscal trajectory.

• The poor structural outlook including low rates and a poor flow picture should continue to weigh on the currency, particularly as the Fed is repriced with little “convergence” in rates in China. Stronger fixings from the PBOC though leave us neutral CNH (0)