Bank of America outlines its currency strategy for 2024, focusing on selling USD rallies, with an emphasis on the differentiation in central bank rate cuts and the performance of high-beta currencies.
Central Bank Rate Cuts:
- BofA anticipates central banks to cut rates less than what is currently priced in the market. Their forecast includes four cuts by the Fed (starting in March), three by the ECB (from June), two by the BoE (from August), and no change by the RBA for 2024.
Market Pricing vs. BofA Expectations:
- Market expectations currently suggest more aggressive rate cuts for various central banks, including six cuts each for the Fed and ECB, five for the BoE, and two for the RBA.
- The bank maintains that 2024 is a year to sell USD rallies, a shift from the previous year's recommendation to buy USD dips. This change is driven by the likelihood of central bank rate cuts, even if these are less than market expectations.
Impact on Currency Pairs:
- EURUSD and GBPUSD are expected to perform well, reflecting the bank's view of eventual USD weakening. The outlook is particularly favorable for high-beta currencies like AUD, CAD, and the Scandinavian currencies.
USD Overvaluation and Global Growth:
- The strategy is influenced by the USD's current overvalued status and the expectation of US growth slowing towards the rest of the world, facilitating a soft-landing scenario.
Bank of America's strategy for 2024 revolves around selling USD rallies, with a focus on the expected discrepancy between market pricing and actual central bank rate cuts. The bank sees opportunities in high-beta currencies and anticipates a gradual weakening of the USD in a global environment of moderating growth and central bank easing.