Australian Dollar: Positive 2024 Awaits Says ANZ

Central Bank

Economic

Summary:

ANZ predicts a bright future for the Australian Dollar (AUD) in 2024, citing positive global financial markets, improved conditions in China, and a strong domestic economy. Analyst Mahjabeen Zaman anticipates a weakening U.S. Dollar, positive risk sentiment, and support from the Reserve Bank of Australia. ANZ forecasts a rise in the AUD/USD exchange rate, starting at 0.68 in March 2024 and increasing throughout the year. Overall, the bank sees the AUD as undervalued and poised for upside.

"Upside ahead," says an Australian banking and capital markets giant laying out its predictions for the Australian Dollar.

ANZ says positive developments in global financial markets, China and the domestic economy will all conspire to make the Aussie a darling of foreign exchange markets in 2024.

"Positive risk sentiment in 2024 will support the AUD and NZD," says Mahjabeen Zaman, an analyst at ANZ.

The Australian Dollar's varied performance in 2023 was a result of prevailing USD direction and developments in China, where the post-Covid rebound failed to materialise and boost China proxies, of which the Aussie is considered.

"Looking ahead, we expect these two factors to dominate," says Zaman, who anticipates a broad weakening in the U.S. Dollar that should boost procyclical trends on global markets, which is traditionally supportive of the Australian Dollar.

"Global risk sentiment is positive as we look into 2024, with global inflation moderating and global central banks easing. This sentiment is feeding into risk assets, and the AUD, being a high beta currency, stands to benefit," says Zaman.

But the Reserve Bank of Australia (RBA) will also offer a hand: "given our view that RBA rate cuts will only begin at the end of 2024, it is likely that the carry advantage that the AUD will have against currencies where interest rates have eased aggressively will matter," says Zaman.

Other supportive domestic props include a current account surplus resulting from strong industrial commodity exports, which helps maintain a floor for the currency.

Australian Dollar: Positive 2024 Awaits Says ANZ_1

Above: "AUD/USD is undervalued based on our Fair Value model" - ANZ.

For the Australian Dollar to U.S. Dollar exchange rate (AUD/USD), ANZ reckons the floor was reached when 0.6270 was printed back in October.

Projections show ANZ pencils in 0.68 for the end of March 2024, 0.69 for the end of June, 0.70 for the end of September, and 0.7 for the year's end.

The corresponding Pound-Dollar profile is 1.30, 1.32, 1.33, 1.34, giving a Pound to Australian Dollar profile of 1.91, 1.91, 1.90 and 1.91.

The flat Pound-Aussie profile reflects expectations for a stronger Pound, which looks set to keep the exchange rate relatively contained.

Elsewhere, a Euro-Dollar profile of 1.11, 1.13, 1.14 and 1.15 gives a Euro to Australian Dollar exchange rate outlook of 1.63, 1.64, 1.63 and 1.64.

Source: PounSterlingLive

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Economic

Party on Wall Street

It's been a stellar year for stock markets. The Dow Jones and Nasdaq 100 both closed at fresh record highs yesterday, despite some pushback from Fed officials who warned that markets are getting ahead of themselves in pricing in such heavy rate cuts for next year.

Investors are raising their exposure to riskier assets at a breakneck pace, as fears about a recession have melted away and a soft landing for the US economy has become the dominant narrative. Speculation that the Fed will launch an easing campaign has also served as jet fuel for this rally, with markets currently pricing in six rate cuts in 2024.

The problem is that US equity valuations are historically stretched, while projections by analysts for 11% corporate earnings growth next year seem a little overoptimistic heading into a global macro slowdown. Uncertainty around the US presidential election could also act as a headwind for markets next year.

Therefore, equity markets are pricing in the best of all worlds - no recession, a cycle of Fed rate cuts, and a serious acceleration in corporate earnings growth next year. All this leaves scope for disappointment in case reality does not match these rosy expectations. As such, the risk/reward profile for US stocks does not appear very attractive here. The asset class is already priced for perfection.

Sterling retreats, dollar ignores Fed commentary

In the FX complex, the British pound came under fire today, following a larger-than-expected decline in the nation's inflation rate. The data suggests that inflation momentum in the United Kingdom is finally losing steam, allowing the Bank of England to join the global rate cutting cycle next year, in order to prop up a stalled economy.

That said, UK wage growth remains extremely hot, so markets still think the BoE will be among the last central banks to push the easing button. This creates a favorable setup for the pound early next year, although it won't be plain sailing, as investors might ultimately focus on the risk that a new Labour government will raise taxes, including on corporations.

Elsewhere, the dollar lost some ground yesterday, brushing aside some commentary from Fed officials who softly pushed back against excessive rate cut speculation and ignoring an upgrade in the Atlanta Fed GDPNow estimate for this quarter. Hence, it seems investors are not trading economics right now, and that year-end flows are in charge instead.

Meanwhile, the yen managed to stabilize, licking its wounds after the Bank of Japan dashed expectations for tighter monetary policy.

Supply concerns lift oil, gold inches higher

In the commodity sphere, oil prices seem to have found some solace from the missile attacks against commercial ships in the Red Sea, which threaten to disrupt global trade routes. Alas, it's questionable whether such concerns will manage to keep oil prices supported for long, against the backdrop of slowing demand next year coupled with record-high US crude production.

Finally, gold prices enjoyed some upside yesterday, capitalizing on the pullback in the US dollar and the persistent retreat in Treasury yields. The precious metal is on track to end the year with gains of almost 12% and close to its record highs as investors appear to be favoring real assets heading into a regime of easier monetary policy.

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Chandan Gupta

Forex

On Tuesday, the USD/JPY illustrated momentous quality, quickly breaching the 145 level. The essential catalyst behind this surge was the reverberating message from the Bank of Japan, reaffirming their status to execute financial approach facilitating as required. This declaration successfully quenched any waiting desires of an up and coming intrigued rate climb at the another month's assembly, signaling that Japan's travel towards approach normalization remains slippery.

The showcase elements presently propose a favorable environment for those looking for to capitalize on plunges, as the break over the 145 limit opens up charming conceivable outcomes, especially concerning the 50-Day Exponential Moving Normal. Numerous dealers and speculators share the assumption that the Japanese yen's defenselessness expands past its matching with the US dollar. To maximize picks up from Japanese yen shortcoming, the GBP/JPY and NZD/JPY sets may offer more promising openings.

The prospect of breaching the 145 level holds noteworthy intrigued, possibly driving the way to the 50-Day EMA. Whereas this might materialize in January, the shortage of liquidity might result in sudden and unforeseen advancements. Because it stands, the slant to brief this showcase remains stifled, at slightest for the show minute. Instep, the center shows up to be on exploring short-term changes and developing a strong base.Within the coming weeks, the market's flexibility will be put to the test. It remains to be seen whether force can pick up footing some time recently the year's conclusion or whether a period of solidification is fundamental to ease the winning offering weight.

One extra figure to consider is that the advertise as of now keeps up a position over the 200-Day EMA.Within the conclusion, the US dollar's vigorous execution against the Japanese yen reflects the vulnerability encompassing the Bank of Japan's financial arrangement position. Dealers are exhorted to remain adjusted to the advancing scene, keeping up a "purchase on the plunges" methodology whereas closely checking key back levels and potential breakout focuses on the skyline.

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Chandan Gupta

Forex

USD/SGD speculators have experienced a fairly narrow price range since Friday and will need to rely on technical considerations for some time to come. The USD/SGD rate traded around 1.34250 late on Wednesday as the US Federal Reserve (Fed) announced its monetary policy statement in its FOMC statement.

As expected, USD/SGD became unstable after the Fed's rhetorical change and entered a rapid and large downtrend.Within an hour and a half, USD/SGD plummeted to around 1.33155 and started looking for direction technically as financial institutions considered their next move.

On Thursday, USD/SGD traded very steadily, falling to a low around 1.32550.As the day progressed, the value of the currency pair started to rise gradually.Perhaps this thinking led traders to believe that the USD/SGD lows were overstated. USD/SGD is currently trading around 1.33220.

Technical traders looking at the medium-term chart of the USD/SINGAPORE dollar will notice that the USD/SINGAPORE dollar has now returned to the medium-term values seen in early August.

When USD/SGD hit its highest low last Thursday, it reached levels not seen since late July. A USD/SGD bearish speculator may have ambitions to drive down the value of his USD/SGD, but he cannot be blamed for that. Many financial institutions seem to be taking a bearish stance regarding the medium-term outlook for the US dollar.

However, short-term developments pose a problem for USD/Singapore dollar speculators as overly ambitious reduction targets are unlikely to be implemented anytime soon.Traders should keep an eye on the USD/SGD outcome as the upcoming Christmas season also brings calm to the forex market, which could lead to a rapid price breakout mixed with inactivity.

Although risk appetite appears to be good and the USD may head towards a bearish stance, traders should not rely too heavily on bearish positions in USD/Singapore Dollar.

The potential for further appreciation since Thursday's low may suggest that financial institutions are finding a balance for USD/Singapore Dollar at this time.

Due to lower price velocity, a dynamic decline like what happened last week is unlikely. With holiday volumes set to decline going forward, traders need to adopt sound risk management to protect themselves from sudden breakouts that can have devastating consequences for unprepared speculators.

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Warren Takunda

Economic

Forex

In a forward-looking analysis, Danske Bank, one of Scandinavia's leading financial institutions, has provided insights into the potential trajectory of the Euro to Dollar exchange rate. According to Danske Bank, there is a likelihood of the exchange rate experiencing an ascent to 1.11 before undergoing a multi-month decline.

This forecast aligns with the prevailing sentiment in global financial markets, which is characterized by improved investor confidence. This positive sentiment tends to benefit both the Euro and the Dollar, driven by the growing belief that global inflation will recede further. This, in turn, is expected to provide central banks with the flexibility to lower interest rates in the coming months.

Stefan Mellin, Chief Analyst for FX Strategy at Danske Bank, advises market participants to consider buying on near-term dips. He points to the potential for USD weakness in the short term, citing the significant easing of financial conditions over the past month and the bearish USD year-end seasonality.

Danske Bank's latest forecast anticipates the Euro-Dollar exchange rate reaching 1.11 within a one-month horizon. Mellin, however, cautions that European investors might still incur costs to hedge their USD FX exposure in the coming year. Despite a decreasing cost, the expense may see further reductions if the Federal Reserve implements policy rate cuts.

Looking beyond the immediate future, Mellin contends that EUR/USD might face downward pressure, presenting attractive short-entry points. He cites various factors contributing to this potential drop, including relative productivity, energy terms of trade, and fiscal sustainability. Even if carry levels remain stable or decrease in the upcoming year, these factors could influence a decline in EUR/USD.

Danske Bank adopts a strategic bearish stance on EUR/USD, forecasting a decline to 1.10 in three months, 1.07 in six months, and 1.05 in twelve months. This projection sets Danske Bank apart from the consensus view, which anticipates a gradual weakening of the dollar throughout 2024, leading to a strengthening of Euro-dollar conversion rates.

The strategic bearish outlook of Danske Bank underscores the complexities and uncertainties surrounding currency forecasts, as analysts weigh various economic factors and global dynamics. Investors and market participants will closely monitor these developments to make informed decisions in navigating the ever-changing landscape of the foreign exchange market.

Source: PoundSterlingLive

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Warren Takunda

Economic

Bank of England rate cut bets have surged in the wake of December's inflation release that showed price pressures were easing rapidly in the UK and could fall to the 2.0% target in a matter of months.

The fall in headline CPI inflation to 3.9% year-on-year in October was met with a frenzy of bets on money markets that showed investors now see the first Bank of England rate cut falling in May of 2024.

"We continue to expect the MPC to reduce Bank Rate by 25bp initially in May, and then at alternate meetings thereafter," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

The scale of the undershoot in all elements of the inflation data caught markets and economists off guard, with the all-important core CPI rate printing at -0.3% month-on-month, which was well below October's 0.3% and the expected 0.2%.

Reacting to the inflation surprise, the overnight index swaps (OIS) market showed investors added to rate cut bets for 2024 and 2025:

Bank of England Rate Cut Bets Surge As Inflation Could Hit 2.0% Target Within Months_1

Above: Rate cut expectations have increased significantly today. Chart updated 09:14 GMT, 20/12/23. Source: Refinitiv. Courtesy of @Capital Edge

The OIS market implies investors are now looking for roughly five cuts in 2024, with the bank rate falling from 5.25% to around 4.0%, followed by four more cuts in 2025 to a year-end rate of c3.0%.

As the chart above shows, this is materially more than was expected just days ago.

The repricing lower in interest rate expectations has boosted UK bond prices, which has corresponded with falling bond yields, which has weighed on the Pound. "With more rate cuts priced in, GBP, to no surprise, is falling," says Thanim Islam, Head of FX Analysis at Equals Money.

Looking ahead, CPI inflation looks set to continue to fall more quickly than the Bank of England predicted in November. Pantheon Macroeconomics says the headline rate of CPI inflation will drop to about 3.8% in Q1 and then to 2.0% in Q2, substantially below the MPC’s forecasts of 4.4% and 3.6%, respectively.

"This will support a sooner and swifter reduction in Bank Rate than the MPC has countenanced to date, though we still think uncertainty over the scope of fiscal loosening in the Budget and the impact of next April’s increase in the National Living Wage on overall wages will mean that the MPC will not cut Bank Rate at its next meeting in early February," says Pantheon's Tombs.

Despite the fall in inflation, some economists warn market expectations for the timing of the first rate cut in May, as well as the total for 2024, are excessive.

"We expect the Bank of England to face more intensive debate about when it can cut interest rates, but to try and push against this whilst it waits for reassurance that the inflation battle really has been won," says Victoria Clarke, UK Chief Economist at Santander CIB.

Santander says the Bank of England will only gain the comfort it needs to start cutting interest rates in summer 2024, implying rate cut expectations must reverse at some point.

Clarke says although inflation is set to trend lower from here, "the trickier problem for the Bank of England is that services inflation is still elevated, and pay growth too, making it difficult for the BoE to conclude inflation will stay at low rates."

Source: PoundSterlingLive

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Warren Takunda

Economic

Central Bank

Forex

The British pound fell as an initial reaction to news inflation in the UK slowed by a far greater rate in November than had been expected.

The Pound to Euro exchange rate dropped 0.40% to 1.1545 after the ONS said inflation fell by 0.2% month-on-month in November, down from 0% in October and lower than the 0.2% increase the market expected.

CPI inflation printed at 3.9% year-on-year in November, down from 4.6% in October, whereas the market anticipated a reading of 4.3%.

The Pound to Dollar exchange rate fell 0.38% to 1.2660 (below chart) as investors bet there was now enough progress in inflation to allow the Bank of England to become more comfortable with the idea of cutting interest rates in 2024. "This really pushes back on the idea that UK inflation is stickier than elsewhere (it really isn't). BoE cuts in May 2024 live," says Viraj Patel, a strategist at Vanda Research.

Pound Sterling: Significant Drop In Inflation Prompts Falls Against Euro and Dollar_1

Indeed, the services inflation level, which the Bank of England is particularly watchful of, eased from 6.6% y/y to 6.3% in November.

Core inflation, another area of interest for the Bank as it strips out energy and food and gives a better reflection of domestic inflation pressures, rose 5.1 y/y, down from 5.7% and below the expectation of 5.5%. To put this downside surprise into context, the lowest estimate out of 28 economists surveyed by Bloomberg was 5.2%.

The outcome resulted from an unexpected -0.3% m/m reading in November, down from 0.3% in October and below the consensus for 0.2%.

While the Pound has taken a near-term hit, the fall in inflation is all the better for UK consumers and bolsters the UK's economic outlook. In the medium term, this should be a supportive development for Pound Sterling.

Pound Sterling: Significant Drop In Inflation Prompts Falls Against Euro and Dollar_2

Jake Finney, economist at PwC, says the decline in inflation provides strong evidence that disinflationary pressures are building in the UK.

"Headline, core and services inflation are all now materially below the Bank of England’s expectations in their last November Monetary Policy Report. Next month's inflation data is likely to follow a similar trend," he says. Economists still expect headline inflation to increase slightly early in the new year as the CPI basket is re-weighted and the household energy price cap is increased by 5%.

Reacting to the positive inflation surprise, the overnight index swaps (OIS) market showed investors added to rate cut bets for 2024 and 2025.

The OIS market implies investors are now looking for roughly five cuts in 2024, with the bank rate falling from 5.25% to around 4.0%, followed by four more cuts in 2025 to a year-end rate of c3.0%.

"Following the big downward shift in BoE rate expectations in recent months, the OIS market is now roughly in line with our own year-end calls for 2024 and 2025 which we have held since June," says Kallum Pickering, Senior Economist at Berenberg.

"Although Bank of England (BoE) policymakers are at pains to push back against growing rate cut bets for 2024 while inflation is still well above target, the direction of travel for prices now seems clear," he adds.