The Federal Open Market Committee donned Santa Claus suits in December and left investors grinning from ear to ear. The risk sentiment bellwether S&P 500 index closed the year with a 24.2% gain, a notable achievement but it paled against the Nasdaq’s 53.8% rally in 2023.
The catalyst was the December 13 FOMC monetary policy meeting. The Fed left rates unchanged as widely expected but surprised the market with a dovish pivot and projected 75 bps of rate cuts by the end of 2024. The Fed may be dovish but other G-10 central banks are not on the same page. The European Central Bank (ECB) left rates unchanged, and President Christine Lagarde claimed that markets were overly optimistic with their rate cut outlook. Bank of England officials pushed back against talk that interest rates would soon be cut.
Tension in the Middle East continued to rise as Israel is determined to eradicate Hamas from the face of the earth. Meanwhile, Russia stepped up its bombing of civilian targets in Kyiv and other Ukrainian cities.
Rate cut fever has infected US markets to the exclusion of all else. Traders are pricing in 150 bps in interest rate reductions by year end. It is also evident in other G-10 markets (except Japan) and expectations of lower global rates is the main theme for 2024.
The USD and Federal Reserve
The US dollar had a very choppy 2023 and when the curtain closed it posted a 9.0% loss against the Swiss franc, 5.2% against the British pound, and 3.1% vs Euro. However, the greenback laid a beating on the Japanese yen, which dropped nearly 10%. AUD and NZD fell marginally. It will be different in 2024.
A Goldilocks scenario is expected to drive the US dollar lower against all the G-10 majors due to the belief that the Fed will be able to slash interest rates without causing any inflation. The US avoided a recession in 2023 despite sharply inverted yield curves suggesting a recession was inevitable.
The final Fed meeting of 2024 was unequivocally dovish and that has economists predicting an economic soft landing this year. However, that assumes that the US labor market normalizes without sparking large job losses. Chicago Fed President Austan Goolsbee pointed out that the actions the Fed is taking to drive inflation lower without causing a recession has never happened.
The December nonfarm payrolls report will be a key metric in determining US dollar direction this month.
The Canadian Dollar and Bank of Canada
The Canadian dollar rode a roller-coaster all year, rising and falling within a USDCAD range of 1.3100-1.3900. Despite those ups and downs, it finished with a 2.2% gain for the year, on December 29.
USDCAD volatility will be the norm in 2024 as traders digest divergent monetary policy between the Fed and the Bank of Canada. Although BoC Governor Tiff Macklem is still stoking the rate hike fires, traders think he is bluffing and have priced 100 bps of rate cuts in 2024. The BoC will be motivated partly to stave off a recession from becoming a depression, which may lead to a Q1 rate cut. The Canadian economy flat-lined in October with GDP at 0.0%, which comes as no surprise to BoC officials who expect economic weakness to persist for the first half of 2024. USDCAD is likely to trade in a 1.3000-1.3500 range in January.
Oil Price
West Texas Intermediate (WTI) oil prices closed out the year a stone’s throw away from where they started and finished the year at $71.65/b. It was a pathetic performance in the face of wars and supply cuts. Saudi Arabia and Russia cut production by 1.3 million b/d in last July while OPEC added another 900,000 barrels of cuts that began January 1, 2024. In addition, Houthi rebels and Iran are disrupting freight traffic through the Red Sea. However, the rise in US crude production and slumping Chinese demand continues to weigh on prices.
Bank 2024-USD/CAD Q1 2024-USD/CAD Q2
Scotiabank* 1.3300 1.3300
BMO 1.3500 1.3400
CIBC 1.3900 1.4200
TD Bank* 1.3800 1.3900
National Bank 1.4200 1.4500
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
