Goldman Sachs On 2024 EM Asia FX Outlook

The US Bank weighs in on the USD/Asia Outlook For 2024. It doesn't see a USD peak just yet, but expects smaller open economy currencies, to outperform those which are more domestically orientated in the region. See below for more details.

• "USD strength is not over just yet. As highlighted in our FX Outlook 2024, we maintain our view that the current bout of USD strength is not over just yet, which should underpin the upward pressure on USD/Asia over the next three- to six-months. As we have reiterated, FX is a relative asset and it is difficult to get structurally bearish on the USD given the divergent growth outlooks amongst the major economies, particularly when the USD offers a positive carry. As outlined in our Global Economics Outlook 2024, our US GDP forecast for 2024 of 2.1% is meaningfully above consensus of 1.0%, while we are just slightly above consensus for the Euro Area (GSe: 0.9% vs consensus of 0.7%), China (4.8% vs consensus 4.5%) and Japan (1.5% vs. consensus of 1.0%). On monetary policy, we do not expect the Fed to cut rates until Q4-2024 (Fed funds rate currently at 5.25-5.50%) and we have pulled forward the first ECB cut to Q3-2024 (ECB Refi rates currently at 4.50%).
• China is already in monetary policy easing mode and the BoJ will only formally exit NIRP in October 2024, in our view. Simply put, the US's growth outperformance (vis-a-vis rest of the world) and more favorable interest rate differentials between the USD and other major currencies (i.e., EUR, CNY and JPY) is likely to persist for at least through most of H1-2024. Given this backdrop, we think the upward pressure on USD/Asia will re-emerge and Asian central banks should maintain their proactive stance to lean against currency weakness. That said, we think there is significant room for differentiation within NJA FX complex and expect the currencies of small open economies to outperform those of the domestically driven economies. Over the medium-term, we think there is scope for the broad USD to ease once growth / rate differentials normalize, and we have bearish USD/Asia forecasts on a 12M horizon."
• "The currencies of the export-oriented economies (KRW, TWD, MYR, CNY, SGD and THB) all underperformed those of domestically driven economies, which also had higher yields (such as the IDR, INR and PHP) vs. the USD in 2023. Asian exports were notably soft over the past year from weaker-than-expected growth in China, inventory destocking and ongoing rebalancing in global consumption from goods to services. The pandemic saw a sharp substitution towards goods (especially tech products) for services initially during lockdowns, which reversed as countries fully re-opened in 2022-2023. Our economists have highlighted that the post-pandemic goods recession has begun to show signs of bottoming out in H2-2023, and we expect this trend (in export recovery) to persist into 2024, which should help support the small open economies in Asia."