Market Commentary
February 1, 2024
By Andrew Lane
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The US dollar is involved in more than 80% of global forex transactions, a level that has remained the same for over two decades. A review of the forex market in 2023 and its outlook for 2024 needs a deep dive into US dollar movements. After a phenomenal year of upswings, the king of currencies entered 2023 with promises of continuing its uptrend. The rally soon faded, however, with the Fed pausing its interest rate hikes and policymakers adopting a more dovish stance. The US dollar index ended 2023 just above 101, having lost around 2% in the year.
With inflation edging up higher than expected in December last year, will the Fed resume rate hikes, maintain elevated rates, or turn dovish in 2024? The fate of the global forex market rests on this important question. The underlying factor is the resilience of the US economy.
Against this backdrop, we’re taking a look at the currencies that were the darlings of 2023 and whether the bulls will continue favouring them in 2024.
Best Performing Currencies of 2023
The Mexican peso was by far the top gainer in 2023, appreciating a whopping 14.8% against the US dollar. This was due to the high interest-rate differential between the peso and the US dollar, following the Mexican central bank’s massive rate hikes that took interest rates in the country to 11.25%.
With de-dollarisation being the theme last year, the Swiss franc found its way to investor portfolios as the safe haven of choice. The currency rose 9.8% in 2023, notching a 9-year high against the US dollar, and became the best performer among the major forex pairs.
The British pound gained 5.3%, despite a battered economy. The sterling’s steep decline in 2022 made the currency more attractive, while the broad-based retreat of the US dollar helped. Also, the UK economy fared better than most were expecting.
The euro added 3.2%, as the EU averted an energy crisis with oil prices down 10% in 2023. The Canadian dollar inched up 2.3% on the back of an economic recovery.
Currencies Shorted in 2023
The Russian rubble tumbled last year, as Western countries continued their sanctions, losing 17.5% against the US dollar. The Turkish lira has been on a downward trajectory for around a decade and lost a whopping 36.6% in 2023, given the country’s soaring public debt and inflation skyrocketing to almost 40%.
On the other side of the globe, the Bank of Japan maintained its ultra-loose monetary policy, widening the rate differential with all major currencies. This weighed heavily on the Japanese yen, which lost almost 7% in 2023. Intensifying US-China tensions and the Asian dragon unable to breathe any fire into the economy sent the yuan lower by 2.8%. These woes impacted the Australian dollar, as China is its biggest trading partner, sending it down 0.1% versus the greenback.
What to Expect in 2024?
Be prepared for wide swings in the US dollar this year, between prospects of the Fed cutting interest rates and data releases indicating resilience in the economy. Let’s not forget the US Presidential elections, which could trigger further greenback volatility. Amid these swings, here are a few currencies that may shine in 2024.
Japanese Yen
Although the Japanese yen has bounced off its 2023 trough, it’s down 20% versus the US dollar since 2021. This makes it among the cheapest major currencies, which could trigger a rebound in 2024.
Low interest rates have not been able to break the deflationary spell in the land of the rising sun. Sentiment for the Japanese yen remains negative, as can be seen on Acuity’s AssetIQ widget.
However, Japanese officials seem set to abandon their ultra-loose monetary policy, while the Fed is gearing up for rate cuts. This will narrow the interest rate differential between the two nations, lending support to the yen.
Euro
Eurozone’s economic performance is unlikely to excite investors in 2024, with a slowdown in consumer spending and lowered fiscal stimulus.
However, while the Fed could begin cutting rates as early as March, the ECB may err on the side of caution, despite inflation easing closer to 3% in 2023. The ECB was a laggard in hiking rates and may begin cutting rates only in the back half of 2024.
Chinese Yuan
Russia is leading the de-dollarisation move and its currency of choice is the Chinese yuan. This saw increased trading volumes of the yuan in 2023. The trend could continue in 2024, as Russia and China move closer to a “no limits” partnership.
With China’s economy struggling to gain momentum amid an ongoing property crisis and weak domestic demand, the government is considering a new debt issuance of 1 trillion yuan ($139 billion) under a special sovereign bond plan. This could stimulate the world’s second-largest economy and support the yuan in 2024.
While the Turkish lira and South Africa's rand are unlikely to recover anytime soon, emerging market currencies are likely to claw back some ground in 2024, as the US dollar experiences pressure amid Fed rate cuts. The only mood buster may be continued geopolitical tensions.
A Key Event to Watch
2024 will play witness to a number of national elections from across the globe. The US Presidential election slated for November will definitely be one the markets will be keeping a close eye on.