Global FX Views You Can Use: Bring on the Cuts

Market Themes: Bring on the cuts, better growth, heavy geopolitics

The final stages of 2023 validated our core views that U.S exceptionalism was fading, the Fed was shifting dovish and the USD was living on borrowed time. Additionally, FX and fixed income made a massive pivot, underscoring a shift to the other side of the central bank cycle.

It's now time for cuts, but global growth expectations don't point to a global recession. Our global growth indicators have improved, suggesting further USD downside through H1. However, it won't be a straight line, especially as geopolitics will feature heavily on the market calendar this year and markets remain data dependent. Fed easing plus fiscal equals more curve steepening and a weaker USD.

Peak tightening, bring on the cuts

• The market regime is pivoting again. Inflation was the focus of 2022 while 2023 brought the recession that never happened. Market returns were quite good to close the year leaving markets to wonder whether to fade or follow.
• Peak rates are behind us, but the key question to start the year is really more tactical in nature. We think things have moved a bit too far too fast, even if the direction of travel is clear for central banks.
• In turn, we like hedging our core bearish USD view in the very short-term, as positioning and short-term valuations are skewed.

Growth is getting better, not worse

• Another key feature of the market dynamics is that while global growth isn't super strong, it's muddling along. Our leading indicators also show signs that things have improved recently, especially in Asia.
• Our tracking of global growth forecast upgrades/downgrades over the coming year skews in favour of upgrades. That could pose some near-term risks to inflation, but we still think supply-side factors should reinforce the broad disinflation theme, allowing central banks to cut rates and boost the 2025 outlook.
• Given that our long-term fair value model points to a broadly overvalued USD, that could benefit some G10 low yielders.

Busy geopolitical calendar this year

• A big focus of 2024 will be the impact of geopolitics. There are critical elections around the world with around 54% of the global population getting a chance to vote. The U.S. election is already gathering market interest, underscoring that investors see a big risk event.
• We also note that market vol is cheap relative to geopolitical uncertainty, so we don't expect a clean and linear story to play out in the price action. That said, it's also clear that elections will meet more bond supply, especially in the U.S.
• Accordingly, the U.S. rates curve is more likely to steepen than flatten. In our backtesting, we've found that a bull-steepening regime is most bearish for the USD.