Q1 2024 Global Currency and Macroeconomic Outlook

• 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)

 

This piece of content  contains the views and opinions of our Global Economic Research and Strategy Team as of 5th Oct 2023 and does not necessarily represent the views and opinions of Millennium Global or any of its Portfolio Managers.

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