Global FX: US dollar downtrend to persist through 2023 and 2024
Risks for Europe/ UK are dissipating, benefiting EUR & GBP against USD. Asia’s growth will also weigh on USD in 2023/24.
The US dollar has now been in a clear down-trend for two and a half months. Having peaked intra-day at 114.8 in late-September and with the DXY index currently around 104.0, the decline to date has been in the order of 9%. By the end of 2023, we expect the cumulative fall to have increased to 13% and, come December 2024, to over 16%. Note though, this will leave the US dollar only marginally below its five-year average of 96.5 on a DXY basis.
Critical to both the recent turn in the US dollar and its expected total loss through 2023 and 2024 is Euro and Sterling’s recovery. From a low of USD0.95, EUR/USD has already surged 11% to above USD1.06. Sterling’s performance has been stronger still, up about 19% from USD1.035 to around USD1.24. These gains have come as a result of a much-improved assessment of the risks these economies face.
For Europe, this has principally been with respect to energy’s availability and cost ahead of winter, with: gas storage now almost filled to capacity; new ongoing supply sources locked in; and the European Commission’s REPowerEU policy providing a clear roadmap towards energy security in the second half of this decade via a rapid take-up of renewables and a focus on efficiency. It is also notable that both activity and the labour market have continued to outperform through 2022, most likely meaning that any decline in activity during winter and spring will be both modest and temporary.
‘Modest’ and ‘temporary’ are certainly not appropriate adjectives for the loss the UK faces versus potential in 2023. Still, the reversal of the unsettlingly expansionary fiscal policy briefly proposed while Liz Truss was Prime Minister in favour of a restrictive stance under Prime Minister Rishi Sunak (albeit with near-term relief from energy prices) has at least given the market confidence that inflation risks will recede in 2023, in line with the Bank of England’s forecast for CPI inflation to be back below target in two years’ time.
Thinking more broadly about their outlooks, Europe arguably has a greater opportunity to benefit from China’s rebound out of COVID-zero as well as Asia’s structural development. For now, Europe is also better positioned globally given the still-low starting level of Euro. For these reasons, there are arguably upside risks to our Euro end-2023 and 2024 forecasts of USD1.11 and USD1.15 (circa 4% and 8% above spot). Meanwhile for Sterling, not only is our baseline expectation contained to USD1.24 and USD1.28 for end-2023 and 2024, so is further upside.
While we expect Canada’s dollar to experience a rebound similar in scale and timing to the Euro, from above CAD1.35 currently to CAD1.28 and CAD1.26 at end-2023 and 2024, Japan’s Yen will lag. From a historically-high JPY135, a sharp move lower seems unlikely until the US FOMC readies for rate cuts. We see this being signalled in late-2023 but not delivered on until 2024 and the first half of 2025. Consequently, at end-2023, USD/JPY is only seen down at JPY132 (-2%); but, by end-2024, we expect the JPY124 level to be reached (-8%, a cumulative move consistent with Euro).
The developing nations of Asia are likely to see a stronger bid than Yen through 2023 and 2024, benefiting not only from a positive change in risk assessment amongst market participants but also as China and the rest of the region’s developing economies show their structural growth capacity.
Free of COVID-zero and with the reforms targeting key sectors such as housing and technology having largely achieved their aims, 2023 should see China’s Renminbi experience a sustained rebound, from around CNY6.95 currently to CNY6.50. In 2024, continued progress in the development of new industry and infrastructure in China while the US remains weak should allow the Renminbi to break through its prior cycle lows of both 2018 and 2022 around CNY6.30 and trend to CNY6.10 (12% below the current spot level of CNY6.95).
Importantly for China’s growth prospects, only around 5% of this move will be in excess of the US dollar trend, limiting the impact on China’s competitiveness. Indeed, the efficiency and productivity China continues to build out across its economy will well and truly trump this FX gain. Being able to consistently improve competitiveness ahead of currency appreciation has been a source of strength for China. This strategy is set to continue delivering large dividends as China focuses on opportunities around the global green transition and Asia’s development.
Both the ASEAN nations and the developed economies of the region such as Singapore, South Korea and Taiwan also stand to benefit from these structural opportunities. ASEAN also has the promise of global tourism’s resurgence and, for some such as Indonesia, commodity endowments provide yet another avenue to profit. For the likes of Indonesia, Thailand and the Philippines, a gain of around 8% is seen to end-2024. Having outperformed as the US dollar rose, Singapore and South Korea’s gains are likely to be limited to around 3%. Assuming geopolitical concerns fade, Taiwan can outperform other developed markets from the region, gaining about 5% from spot.
This analysis was initially released in the December 2022 & January 2023 Westpac Market Outlook. (PDF 406KB)
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