Head of Macroeconomic Research
Summary: In today's edition, we focus on the FX space and discuss the evolution of risk perception.
Our FX risk indicator is based on the evolution of Asian currencies (excluding Japanese yen) versus the US dollar. Since Q2 2019, we see a continued improvement in risk appetite in the FX space, which has not happened since the end of 2017/early 2018. In our last update, our indicator is up 1.3% vs the USD on a quarterly basis. The most important driver of risk appetite/risk aversion has undoubtedly been the US-China trade war over the past two years. It has played a key role as driver of FX exchange rate, notably in Asia. The recent trade truce which has been formalized by the Phase 1 trade deal, along with year-end improvement in USD liquidity have favored risky assets versus safe heavens. We expect this trend will be prolonged in Q1 this year as liquidity will keep increasing and geopolitical risk should remain broadly contained, at least on the Chinese-US front.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
