2024 G10 FX Outlook: Navigating a Dollar Bear Trend and Protecting Against Volatility
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A year ago writing for the 2023 G10 FX outlook, we were calling for less trend and more volatility. That worked for the first half of the year before a dollar bull trend took over. Based on our call for Fed easing next year, we now argue that G10 FX markets will be characterised by more trend – a dollar bear trend, that is – and less volatility.
To challenge the dollar, currencies will need a lot of protection
A typical financial market response to the start of a Federal Reserve easing cycle would be a bullish steepening of the US yield curve on the prospect of reflationary policy coming through. To speak of ‘reflationary’ policy right now seems criminal – but the Fed has a dual mandate, and if inflation is coming under control through 2024 it can cut rates to ameliorate the impact on the labour force.
Bullish steepening of the US yield curve normally favours the commodity currencies, and that's our conviction call in the G10 space. As outlined in our Behavioural Equilibrium Exchange Rate (BEER) model below, the commodity currencies are the most undervalued in the G10 space. Their extreme undervaluation provides some much-needed protection against any continuing dollar strength. Notably, the euro and sterling do not have such protection.
Looking across the currency blocs then – after relatively range-bound trading into year-end – we expect the dollar bear trend to pick up a little pace into the second quarter of 2024 as the short-end of the US curve starts to come substantially lower.
European FX should be lifted, but stagnant eurozone growth and the risk that the European Central Bank cuts too early suggest that EUR/USD does not lead this rally. Neither does GBP/USD, given our mildly bullish view on EUR/GBP and 100bp of Bank of England easing. Having outperformed this year, we expect the Swiss franc to be flat against the euro in 2024 as the Swiss National Bank seeks more stability than strength in the nominal trade-weighted franc.
Better positioned in Europe we think (and conditioned on a lower interest rate environment) are the Scandi currencies. Both the Norwegian krone and the Swedish krona are undervalued – the krone more so. Both central banks would prefer stronger currencies and the krone probably has a better chance of a recovery in 2024 given a stronger economy and its more severe undervaluation after the rally in energy prices.
