FX Talking December: Calibrating the turn
November gave us a glimpse of what we could expect in FX markets next year – a broadly weaker dollar and some outperformance of the pro-cyclical currencies. Yet as we have seen this month, calling the turn in the dollar will not be easy. We suspect it will take a few more months before a clear dollar bear trend emerges
Executive summary
Patience is a virtue. And that certainly seems the case in FX markets at the moment as those investors wanting to back a broad sell-off in the dollar will have been left frustrated. Indeed, one core story for the next month should be central bankers in core markets pushing back against aggressive pricing of monetary easing in 2024 – the result of which should be a slightly stronger dollar and weaker pro-cyclical currencies.
That probably means EUR/USD can spend some more time near this 1.07 area. And one of our core themes in our recently published 2024 FX Outlook is that European currencies will not be the major beneficiaries of a weaker dollar. Expect the EUR/USD bull trend only to pick up pace in the second quarter of 2024 and end the year somewhere near the 1.15 area.
Very much in focus over the next month will be the Japanese yen. January, rather than this month, should see the larger independent gains in the yen. Elsewhere, we think any setback in the undervalued commodity currencies will be temporary.
In EM, we generally like the currencies in the CEE4 space on the back of politics and some better growth. The soft Chinese renminbi may continue to restrain Asian FX for some time, but the appeal of high real yields should keep Latam currencies in demand.
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