T3 Monthly Insights - Dec 2023

Following the December meeting, Federal Reserve officials expressed growing confidence in steering the U.S. economy toward a soft landing, signaling a shift towards rate cuts. This news acted as a Christmas gift for investors, propelling stocks and gold to historical highs and concluding a volatile 2023. The DXY closed the year with a 2.12% loss, ending at 101.33. With the likelihood of further rate hikes diminishing, the focus of FOMC discussions is now on determining the economic conditions warranting rate reductions. The key insight from the December policy meeting is the Fed's projection of a soft landing, with plans to cut the federal funds policy rate by at least 75 bps in 2024 to support ongoing business expansions. The challenge now is for Fed officials to determine the optimal timing for rate cuts, as an early move could jeopardize the return of inflation to the Fed's 2.00% target.

In contrast to the Fed's pivot, both the ECB and the BoE are not rushing to follow the U.S. into rate cuts. Both institutions underscored the need for caution, emphasizing that a further slowdown in inflation is not guaranteed and signaling that easing is not on the agenda for now. EUR and GBP both advanced against the weaker U.S. dollar. The ECB held rates steady at 4.00%, revising growth and inflation forecasts lower, with the EUR ending the year at 1.1068, marking a 3.82% yearly gain. Meanwhile, the BoE maintained its policy rate at 5.25%, keeping the door open for another hike if necessary. GBP closed the year at 1.2734, adding 5.62% to its yearly gains.

The yen reached a six-month high following a dovish Fed before retracing some gains to close the year at USDJPY 141.43 as the Bank of Japan kept ultra-low interest rates unchanged. The continued divergence in rates policy resulted in an overall 6.41% loss for the yen against the dollar.

Commodities currencies staged a strong comeback in the last quarter of the year, finishing the year close to their starting level. The Aussie reached a six-month high of 0.6826, registering a 0.89% yearly gain, supported by the RBA's hawkish stance as it maintained cash rate at a 12-year high of 4.35%. The Kiwi experienced similar price action, closing at 0.6335 with a 2.91% gain for the month and a minor 0.17% yearly loss. Weaker-than-expected Q3 GDP data raised bets on potential rate cuts, despite the RBNZ's hawkish outlook. The Canadian dollar gained 2.29% against the greenback in 2023, ending at USDCAD 1.3243. Despite inflation cooling from its peak of 8.10% to 3.10%, the BOC maintained a hawkish bias and kept rates steady at 5.00%.

Gold surged to a new all-time high, reaching $2,135.40 an ounce, driven by Fed Chair Powell’s dovish pivot and growing expectations for U.S. rate cuts early next year. Gold concluded 2023 at $2,062.98, registering a 13% yearly gain, and expectations for further increases in 2024 are underpinned by a dovish Fed, ongoing geopolitical risks, and continued purchases by governments and central banks.