J.P.Morgan: Converging To Fair Value

J.P.Morgan write “having broken down in 3Q and early 4Q, it appears the FX - equity correlation strengthened into year-end with both asset classes rallying on the prospect of Fed rate cuts.”

• “Elevated inflation and a robust labor market are likely to see the RBA maintain its hiking bias in 1H24 with Australia to deliver rate cuts later than others in DM, most notably the US where we forecast 100bp of cuts in the year ahead.”
• “If realized, this dynamic will see rate differentials widening in AUD’s favor; however, forward OIS metrics already reflect a degree of policy convergence suggesting this story is, to an extent, priced by markets.”
• “Accordingly, we only see limited upside from current levels with AUD/USD to reach $0.69 by mid-year.”
• “Of course, FX drivers are broader than just a rates story with the standard transmission from high commodity prices to the broader economy - which we have long described as dormant - starting to awaken via the Commonwealth Budget and prospects for fiscal easing.”
• “Personal tax cuts are due in 2024, alongside expansion of government spending programs, which raises the debt servicing capacity of the household sector and supports consumption/GDP growth.”
• “These dynamics are likely to be a secondary consideration for FX directionality given expectations/market pricing for monetary policy in the year ahead, but at the margin should prove supportive for AUD in 2024.”