Monthly Overview: January 2024

Looking forward to the coming year, we can confidently predict that it will bring changes distinct from those experienced in 2023. Three significant factors will primarily influence the business and investment landscape.

  1. To begin with, the period of monetary tightening following the Covid-19 pandemic in most high-income nations, excluding Japan, has concluded. The current focus is on determining the timing and pace of interest rate reductions. As inflationary pressures ease and economic growth slows, market sentiment has shifted notably. After a year dominated by expectations of sustained high interest rates, there’s now a growing anticipation of substantial rate cuts by major institutions like the Federal Reserve and the European Central Bank. Additionally, a number of central banks in emerging markets, particularly in Latin America and Central Europe, have already started lowering their rates.

    To begin with, the period of monetary tightening following the Covid-19 pandemic in most high-income nations, excluding Japan, has concluded. The current focus is on determining the timing and pace of interest rate reductions. As inflationary pressures ease and economic growth slows, market sentiment has shifted notably. After a year dominated by expectations of sustained high interest rates, there’s now a growing anticipation of substantial rate cuts by major institutions like the Federal Reserve and the European Central Bank. Additionally, a number of central banks in emerging markets, particularly in Latin America and Central Europe, have already started lowering their rates.

    The Federal Reserve’s balance sheet has undergone a significant reduction, shrinking to just under 29% of the United States’ GDP, down from almost 33.5% at the close of 2022. However, the impact of this reduction on reserves is less pronounced due to the decreased utilization of the Fed’s reverse repo facility, which helped mitigate the effects. This situation is expected to evolve, with predictions indicating that Quantitative Tightening will likely conclude by mid-2024.

    Similarly, the European Central Bank (ECB) saw a decrease in its balance sheet to around 49% of the Eurozone’s GDP, a drop from nearly 60% at the end of 2022. In 2024, the ECB plans to decelerate and eventually halt the reinvestment of the maturing proceeds from its pandemic-era purchasing program. Prior to the Covid-19 pandemic, the ECB’s balance sheet constituted about 39% of GDP, compared to the Federal Reserve’s near 19%.

    The Bank of England’s balance sheet also experienced a reduction, currently standing at around 30% of the UK’s GDP, down from just over 37% at the end of 2022. This figure was slightly above 21% before the pandemic.

    In contrast, the Bank of Japan’s balance sheet expanded to more than 129% of Japan’s GDP, up from about 126.5% at the end of 2022. Before the Covid-19 pandemic, it was approximately 103%, indicating a substantial increase in the Bank of Japan’s balance sheet relative to the country’s GDP.

  2. The upcoming year is noteworthy for its significant electoral activities, encompassing countries that collectively represent nearly half of the global population. The majority of these elections are scheduled for the first half of 2024, with the cycle commencing early in the year.

    Taiwan sets the stage with its election on January 13, marking the beginning of 2024’s electoral proceedings. While the United States’ election isn’t until November, its influence is already being felt. In the United Kingdom, although an election date has not been officially set, many anticipate it might occur in late 2024. There’s also speculation about a potential early election on May 2, aligning it with local elections

    Japan, meanwhile, does not have a scheduled election. However, Prime Minister Kishida faces a challenging political environment, with a high disapproval rating and potential vulnerability to an internal leadership challenge within the Liberal Democratic Party. This party has been a dominant force in Japanese politics, similar in duration to the Communist Party’s rule in China. Additionally, the governing coalition in Germany appears to be in a precarious state, adding another layer of political intrigue to the year ahead.;
  3. In 2024, geopolitical events will significantly influence the business and investment climate. The war in Ukraine, entering its third year, is a major factor, yet the unified opposition to Russia shows signs of strain. In the United States, about half of the population believes excessive funds have been spent on Ukraine, and the Republicans are looking to make this a key issue in their campaigns. European support also seems less certain, with Hungary’s Orban recently obstructing an EU aid initiative and a general decline in enthusiasm across the continent. Despite these challenges, Ukraine is receiving more advanced weaponry, and the U.S. Biden administration is considering using frozen Russian assets to support Ukraine.

    In the Middle East, the situation remains tense. Attacks by Hamas on Israel have significant global implications, strengthening the Beijing-Moscow-Tehran axis and revealing a divide between U.S./European political leaders, who staunchly defend Israel’s right to self-defense, and public opinions that draw parallels between Israel’s response and Russia’s actions in Ukraine, as well as America’s past military engagements. This has led to some erosion in President Biden’s support, mainly due to defections from the Democratic Party’s base.

    Unresolved territorial disputes continue to create tension, particularly in the Asia Pacific region. China’s actions towards Taiwan and the Philippines, the latter of which is covered by a U.S. defense treaty, are escalating tensions. Furthermore, China’s territorial encroachments on Nepal and Bhutan are concerning. Globally, the concept of deterrence appears to be less effective, as evidenced by Russia’s invasion of Ukraine, Hamas’s attacks, and the Houthi’s rocket strikes, which have disrupted Red Sea transit and rekindled supply chain issues. This broader context of diminishing deterrence underscores the complexity and volatility of the current global geopolitical landscape.

In 2024, the United States may intensify efforts to curb China’s technological advancement by restricting its access to semiconductor fabrication technology. This could extend beyond cutting-edge technologies used in AI to include even earlier generations of semiconductors. Additionally, the U.S. is contemplating increasing tariffs on Chinese electric vehicles. The outcomes of a comprehensive three-year review by the Biden administration are expected in early 2024. On the other hand, Beijing has recently implemented a ban on certain rare earth processing technologies and magnets. The International Energy Agency reports that China is responsible for 60% of global rare earth mining and 90% of the processing and refining capacity. This move follows China’s earlier restrictions on three essential elements used in chip manufacturing.

Regarding macroeconomic trends, two developments that defined 2023 are unlikely to repeat in 2024. Firstly, the U.S. economy surpassed expectations significantly. While the median forecast among Federal Reserve officials in December 2022 was a mere 0.4% growth, this outlook improved substantially to 2.6% by December 2023, surpassing the 1.8% rate considered as the non-inflationary limit. The median Fed projection for 2024 anticipates a slowdown to 1.4% growth.

Secondly, there was a notable decline in inflation rates. The transitory component of inflation was larger than initially thought, leading to a moderation in the Consumer Price Index (CPI) as supply chains were repaired and food and energy prices decreased from their 2022 peaks. In the U.S., the headline CPI dropped from 6.5% at the end of 2022 to 3.1% in November 2023. Similarly, Eurozone, UK, Canada, and Japan also saw significant reductions in their CPI rates. However, progress on inflation is expected to be gradual and uneven. The next phase of monetary easing is likely to commence before inflation rates return to their respective targets.

In China, inflation turned into deflation by November 2023, influenced heavily by falling food prices, particularly pork. Excluding food and energy, China’s CPI saw a modest increase. Interestingly, Chinese consumption has been potentially underestimated, as per capita consumption has doubled over the past decade. Chinese retail sales and investment in fixed assets also showed growth in 2023.

In emerging market economies, particularly in Latin America and Central Europe, the interest rate cycle has already shifted, with more countries like Mexico, India, South Africa, South Korea, and the Philippines expected to follow in 2024. While the premium that emerging markets pay to borrow dollars over U.S. Treasuries narrowed significantly in 2023, emerging market equities underperformed compared to developed market equities, excluding China’s poor performance.

The Bannockburn World Currency Index (BWCI), which is a GDP-weighted basket comprising currencies from the twelve largest economies, saw a slight increase of about 0.65% in December. This uptick helped to reduce the index’s overall loss for the year to approximately 1.35%. Notably, the U.S. dollar weakened against all the currencies included in the index.

In terms of individual currencies, the South Korean won recorded a modest gain of 0.15%, but its impact on the index was limited due to its relatively small 2.1% weighting. The Chinese yuan, with a significant 22.7% weight in the index (second only to the U.S. dollar’s 32.1%), rose by around 0.5%. The Mexican peso, an emerging market currency with a 1.8% weight in the index, led gains among its peers with a 3% increase. Among the G10 currencies, the British pound sterling had the smallest gain of 0.9%, with a weighting just under 4%. The Japanese yen was the top performer overall in December, appreciating by about 5.1% and carrying a 5.3% weight in the index.

Looking ahead to 2024, there is an expectation for the BWCI to appreciate and break its three-year declining trend. This anticipated rise aligns with the expected depreciation of the U.S. dollar, as the relative economic performance and interest rate advantage of the U.S. diminish. A return of the BWCI to the 98.00-99.00 range, which was prevalent before the Covid-19 pandemic, would indicate a new phase in global currency dynamics.

According to the Organisation for Economic Co-operation and Development’s (OECD) purchasing power parity model, both the euro and the yen are currently about 50% undervalued, and the British pound is nearly 20% undervalued. These are considered extreme deviations. The Bank for International Settlements (BIS) model, which assesses real equilibrium exchange rates, suggests that the Chinese yuan and the South Korean won are among the most undervalued currencies in the emerging market segment. By contrast, the BIS calculations indicate that the Mexican peso might be the most overvalued currency in the index, following the U.S. dollar.

United States

There has been criticism, including from ourselves, about the delayed end to the Covid-era quantitative easing and the onset of monetary tightening. However, the market has frequently anticipated the end of interest rate hikes and the start of rate cuts, often preceding signals from the Federal Reserve. At the Federal Open Market Committee (FOMC) meeting on December 13, the median projection was for three rate cuts in 2024. The derivatives market is pricing in slightly more than 150 basis points of cuts for the year, with the first reduction almost fully expected by the end of Q1 2024. These anticipations have had significant effects on capital markets, leading to lower yields and a weaker dollar, while enhancing the appeal of risk assets and non-interest-bearing financial assets like gold and cryptocurrencies. However, there’s a risk of the market getting ahead of itself, as evidenced by the nine-week rally in the S&P 500, the longest in two decades.

We anticipate that Federal Reserve officials will continue to counter these early easing expectations, supported by a strong labor market and above-trend growth in Q4 of 2023. Lower headline rates in early 2024 are likely due to favorable base effects for the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) deflator. Yet, projections from Bloomberg’s survey and Fed officials suggest that the headline PCE will remain above the 2% target at 2.4% by the end of 2024 and slightly above target by the end of 2025.

Regarding fiscal policy, the U.S. budget deficit is expected to stay close to the 6.2% projection for FY23, at around 6.1% in FY24. Temporary spending bills are set to expire in two phases, on January 19 and February 2, which could lead to a partial government shutdown without a resolution. The upcoming national election in November is also influencing policy considerations, with potential tax cuts or changes in depreciation allowances impacting business investment decisions.

Internationally, Europe and others may need to brace for a “dormant NATO” situation. With growing expectations for rate cuts, some banks have been borrowing from the Bank Term Funding Program (BTFP), introduced during last spring’s banking pressures, and lending back to the Federal Reserve for a risk-free profit. Officials are likely to discourage this practice, and the BTFP facility is scheduled to end in early March.

Banking stress, initially due to managing risks in a high-interest-rate environment, might shift to concerns stemming from lower interest rates and weaker growth prospects. This scenario could reveal credit scores that were artificially boosted during Covid and the suspension of student loan servicing. Commercial real estate remains a concern, yet bank share indices have risen significantly, hitting near nine-month highs but appearing overstretched.

The Dollar Index’s low in 2023 was around 99.60, ending the year near 101.25. We expect it to decrease to the 93.00-95.00 range in 2024, although historically, in nine of the twelve election years since the adoption of floating exchange rates, the Dollar Index has risen, averaging an increase of almost 6.80%. However, the three declines in the last five election years add complexity to this election year cycle.


The Eurozone economy experienced stagnation in 2023, and the outlook for 2024 doesn’t show significant improvement. The European Central Bank (ECB) forecasts a modest growth of 0.8% in 2024, slightly better than the 0.6% growth in 2023. However, the easing of price pressures has opened up room for a more lenient monetary policy. The year-over-year Consumer Price Index (CPI) increase slowed down considerably, dropping to 2.4% in November 2023 from a high of 9.2% at the end of 2022. Though this may slightly overstate the easing of inflation, a modest acceleration in prices is expected in the coming months.

Details on the December agreement regarding new fiscal rules in the Eurozone are yet to be fully disclosed. However, the broad framework suggests adherence to the Stability and Growth Pact’s objectives, which include a 3% deficit cap and a 60% debt ceiling, while allowing for a more flexible adjustment process. The swaps market is indicating expectations of nearly 75 basis points of rate cuts by the end of the first half of 2024, and almost 165 basis points by year-end.

The ECB plans to decelerate the reinvestment of maturing bonds purchased under the Pandemic Emergency Purchase Programme, with an aim to conclude this process by the end of 2024. The European Parliamentary election, scheduled for June 6-9, will lead to the formation of a new European Council. Belgium will hold the rotating presidency of the European Council for the first half of 2024, followed by Hungary in the second half, which could be contentious given the ongoing disagreements, including Budapest’s veto of aid to Ukraine.

The euro, after hitting a 20-year low near $0.9535 in September 2022, made a substantial recovery to $1.1275 by mid-July 2023. However, renewed divergence with the US caused it to drop back to around $1.0450 in early October, before rising again to $1.1140 by late December. Looking ahead to 2024, the euro is expected to exceed its 2023 high and potentially reach between $1.17 and $1.18.

United Kingdom

The UK economy has faced challenges since its 0.3% growth in Q1 of 2023. It remained stagnant in Q2 and saw a slight contraction of 0.1% in Q3. The situation didn’t improve at the start of Q4, as evidenced by a 0.3% decrease in output in October. Despite a slow start, inflationary pressures in the UK eased significantly over the course of 2023, with the Consumer Price Index (CPI) dropping from 10.1% at the end of Q1 to 3.9% in November. However, the core inflation rate has been more persistent, standing at 5.1% in November, down from 6.3% a year earlier. Meanwhile, average weekly earnings increased by over 7% year-over-year in the three months through October.

At the Bank of England’s mid-December Monetary Policy Committee meeting, three out of nine members voted in favor of increasing interest rates. Nonetheless, the market is leaning towards the expectation that the Bank of England will cut rates due to the weak economy and moderating price pressures. Swaps market data indicates that the first rate cut is fully expected by early May, with almost 175 basis points in cuts anticipated for 2024.

The UK government is projected to call for elections in late 2024. Current polls show the Conservatives trailing Labour, with indications that neither of the two main parties is capturing more than two-thirds of voter support, suggesting that a coalition government might be a probable outcome.

In terms of currency, the British pound sterling was the second strongest among the G10 currencies last year, appreciating approximately 5.5% against the US dollar and about 2.2% against the euro. After reaching a record low near $1.0350 against the dollar in 2022, sterling rebounded to around $1.3140 in mid-July 2023. However, due to expanding growth and interest rate differentials, it fell back to nearly $1.2035 by early October, before recovering to around $1.2825 in November and December.

Looking ahead, if the market reassesses the timing and extent of US rate cuts, sterling might retreat to the $1.2400-$1.2500 range. Nevertheless, expectations are for sterling to surpass its 2023 high, potentially reaching into the $1.33-$1.35 area.


The U.S. dollar reached its peak near CNY7.35 in early September but then declined to six-month lows in December, falling just below CNY7.09. While the yuan’s exchange rate is closely managed, it largely seems to follow the broader movements of the dollar. Despite the yuan lagging behind other major currencies, as indicated by its trade-weighted measure ending 2023 near three-month lows, the expectation is for the dollar to drop below CNY7.0 in 2024.

The yield premium of the U.S. 10-year Treasury over its Chinese counterpart reached a peak of slightly more than 225 basis points in mid-October, but this gap narrowed by about 100 basis points by the year’s end. The decision by major Chinese banks to cut deposit rates in late December spurred anticipations of more accommodative monetary policy from the People’s Bank of China (PBOC) in early 2024. Although foreign investors showed interest in the bonds of large Chinese banks in November, they remained cautious about investing in mainland Chinese stocks. The CSI 300 index was one of the poorest performers among major stock exchanges in 2023, with a loss of nearly 12%.

Regulatory developments in China, particularly in the videogame sector where new rules were introduced and over 100 new games were swiftly approved, underscore the persistent policy risks. The regulatory environment and other factors, such as cyclical and geopolitical considerations, are leading foreign companies to be hesitant about retaining earnings in China.

The bilateral relationship between the U.S. and China continues to be strained despite the meeting between Presidents Biden and Xi. As 2023 concluded, there were reports that the U.S. might increase tariffs on Chinese electric vehicles from the existing 25% and expand restrictions to include legacy semiconductor chip technologies. The Biden administration is expected to complete its three-year review of the tariffs initially imposed by the Trump administration in early 2024. Meanwhile, Beijing has imposed bans on rare-earth processing technology and rare-earth magnets, in addition to earlier restrictions on gallium, germanium, and graphite.

In terms of economic growth, there may be an underestimation of Beijing’s commitment to supporting its economy. The International Monetary Fund’s (IMF) forecast of 4.2% GDP growth for China in 2024 seems conservative, and a more realistic expectation might be closer to 5%.


The Japanese yen experienced a notable appreciation against the U.S. dollar in the fourth quarter of 2023, rising by almost 6%. This marked only the second quarterly gain for the yen since the end of 2020. The yen’s recovery was driven by two main factors.

First, the broadly weaker U.S. dollar, influenced by lower interest rates and the market’s anticipation of rate cuts by the Federal Reserve, played a significant role. Second, there is a growing expectation that the Bank of Japan (BOJ) will exit its negative interest rate policy by the end of April 2024. This timing coincides with the conclusion of the spring round of labor negotiations and the end of the government’s extended subsidies for electricity and gas, which have been estimated to reduce the headline Consumer Price Index (CPI) by about 0.5%.

Interestingly, Japan’s core inflation, which excludes fresh food, had peaked at 4.2% in January 2022 but had decreased to 2.5% by November. Japanese investors, who had been net sellers in the global bond market in 2022, returned as buyers in 2023. According to data from the Ministry of Finance, they purchased an average of about JPY400 billion (~$2.85 billion) per week in 2023, contrasting with the selling of about JPY420 billion per week in 2022. This shift occurred despite higher yields available domestically. At its highest point in mid-October, the yield premium of the U.S. 10-year Treasury over its Japanese counterpart was around 415 basis points, the most significant since 2001. The spread ended the year near 320 basis points.

Japan’s economy struggled with weak consumption and private investment in the middle two quarters of 2023, leading to an overall contraction in Q3. The BOJ projects a 1% expansion for the economy in 2024. Prime Minister Kishida’s public support remains weak, and although a general election isn’t mandated until the end of October 2025, a leadership challenge within the Liberal Democratic Party (LDP) appears likely by October 2024.

Looking ahead, the dollar is expected to fall back into the JPY130-JPY135 range in the coming year.


The Reserve Bank of Australia (RBA) increased its overnight cash target rate by 125 basis points in 2023, reaching 4.35%. This rate hike was somewhat more conservative compared to most other G10 countries. Inflation in Australia has been somewhat more persistent, registering at 4.9% year-over-year in October. As a result, the RBA is expected to be slower in reducing rates compared to other central banks. The swaps market is currently pricing in around 60 basis points of rate cuts for 2024.

The central bank’s projections for the Australian economy include a decrease in inflation to 3.3% (down from 4.5% in 2023), an increase in unemployment to 4.5% (up from 4.0%), and stronger economic growth at 1.8% (compared to 1.3%). However, the International Monetary Fund (IMF) has a less optimistic outlook, forecasting 1.2% growth, 4.0% inflation, and 4.3% unemployment for 2024.

The Australian dollar (AUD) experienced a significant upswing in November and December, rising by about 7.9%, which brought its performance against the U.S. dollar to nearly flat for the year. The AUD reached its peak in February near $0.7160 and hit its yearly low around $0.6270 in late October. The rally in the last two months of the year lifted it to $0.6870. Speculators in the futures market covered roughly half of their net short positions on the AUD in Q4 2023, but they have not held a net long position since mid-2021.

The AUD’s exchange rate appears to be highly sensitive to the broader movements of the U.S. dollar and the overall risk environment. There is a concern that the markets might have been too aggressive in anticipating U.S. rate cuts, which has impacted the U.S. dollar. The Australian dollar saw appreciation in nine of the last eleven weeks of 2023, leaving momentum indicators overstretched. A potential correction could lead to a pullback toward $0.6650 in early 2024. However, it is expected that the AUD will make an attempt to reach the $0.7000-$0.7200 range later in the year.


The Canadian economy experienced stagnation after a robust start in 2023. The headline Consumer Price Index (CPI) slowed to 3.1% in October and November, following a rate of 6.3% at the end of 2022. The Bank of Canada raised interest rates in January and then paused until June and July, when it increased rates by a total of 50 basis points, bringing its overnight lending target to 5.0%. According to the swaps market, the first rate cut is anticipated for April 2024, with the central bank expected to deliver slightly more than 150 basis points of cuts over the year.

The Bank of Canada projects that economic growth will slow to less than 1% in 2024, with headline CPI moderating to around 3%. On the fiscal policy front, the Trudeau government is set to implement a 3% digital services tax starting in 2024, retroactively effective from January 1, 2022. This tax will be applied to revenue earned in Canada by companies with global revenue of approximately $795 million and Canadian sales exceeding C$20 million, regardless of the company’s headquarters location. The United States has opposed this tax, claiming it unfairly targets U.S. companies, and has threatened retaliatory measures.

In currency markets, the U.S. dollar reached its highest point of the year near CAD1.39 in early November but declined to below CAD1.32 by late December. Over the year, the Canadian dollar appreciated by about 2.6%, making it the strongest performer among the dollar-bloc currencies. However, momentum indicators suggest a potential rebound for the U.S. dollar, possibly extending into the CAD1.3400 area early in the new year.

Despite this potential short-term recovery for the U.S. dollar, the expectation is that the 2023 low, slightly below CAD1.3100, will be surpassed. The target for the Canadian dollar is projected to be in the CAD1.28-CAD1.29 range.

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