Monetary Hawk to Dove Considerations - VBCE’s 2023 Market Review and 2024 Outlook
December 28, 2023
Defying expectations, surprising, instability, turbulence, opportunity are some of the words used to describe a year of worldwide FX market conditions as we saw the US Fed and Bank of Canada monetary policy at work in 2023. Increasing the overnight rates to avoid recession was the theme this year, and we wanted to learn more about the impact on the FX and precious metal markets.
Will there be monetary easing or continued tightening to stimulate the economy? How was the Precious Metals market impacted by these surprises in instability? What are people buying or selling?
VBCE Traders Steve Brown, Garo Mavyan, Pandu Vitharana, and Jeffrey Wong shared their answers to these questions in our annual look back at 2023, and look forward to 2024.
How would you summarize 2023 as a FX and Precious Metals Trader?
Trader Pandu Vitharana shares that in 2023, “FX markets experienced instability, particularly with US regional banks like Silicon Valley Bank (SVB) and Signature Bank drawing attention. Europe witnessed turbulence as Credit Suisse's collapse in Switzerland heightened Swiss franc volatility, yet the Euro rebounded, recovering from 2022 losses due to the European Central Bank’s (ECB) rate hikes and a renewed investor confidence.”
Vitharan looks back at Precious Metals and shares “market saw a historic surge in gold prices, driven by concerns about inflation, geopolitical tensions, and monetary policy shifts, highlighting gold's role as a safe haven amid global financial volatility.”
Trader Garo Mavyan reflects that “2023 was dominated by the battle against inflation. Central banks like the US Fed and Bank of Canada raised rates in the early part of the year to try and tame inflation as much as they could whilst trying to keep things as steady as possible. Whilst both banks did decide to keep rates steady nearer to the end of the year, they did not indicate when we might start to expect some rate cuts. Thus, market volatility surrounding this uncertainty in the timing of any cuts prompted the USD to jump to a high of about 1.388.”
What were the most surprising market changes you saw this year?
Trader Steve Brown reflects “the most surprising market change was the abrupt change in sentiment towards the USD. Through the first 10 months of the year, the USD was the best performing currency with the broad USD index touching 10 month highs @ 107 in early November. The USDCAD rate was trading near 2.5 year highs @ 1.3899 while oil prices had fallen to $80 / barrel. The U.S. Fed was hawkish and would not rule out that further interest rate hikes were necessary to combat inflation. The market was pricing in a 30% chance that the Fed would cut interest rates 3 times in 2024 (taking the key rate from 5.50% down to 4.75%).”
Brown continues to look at what the past actions and activity means to the year ahead “over the next few weeks, U.S. economic data related to employment and inflation consistently missed market expectations. Data pointed to a declining trend in inflation and employment gains. Noting an easing of price pressures, the U.S. Fed abruptly pivoted from hawkish to dovish at the Dec. 13th meeting. USD losses accelerated taking the broad USD index down to 5 month low. USDCAD also dropped to 5 month lows @ 1.3219 despite lower oil prices (oil had fallen to 6 month lows @ $68 on Dec 13 and has since rallied 10% to $75). Market pricing on U.S. interest rate cuts in 2024 has changed dramatically. There is now a 33.8% chance that we see a 1.75% reduction in the key interest rate down to 3.75%.”
Trader Jeffrey Wong noted “the most surprising market change this year was how the North American economy defied economic expectations. The probability of a soft landing narrative was considered low a year ago, especially given the FED’s track record, but going into the end of 2023, it seems like a soft landing is becoming increasingly possible. With the unemployment rate maintaining for the last few quarters and core inflation in the US coming closer to the target 2%, the path for governments to normalize interest rates, while likely not to fully materialize until 2025, is finally in sight. The final Federal Open Market Committee (FOMC) meeting of the year indicated that the FED had indeed pivoted from their hawkish stance to a dovish one.
Trader Vitharana feels, “contrary to expectations, the Canadian dollar has shown unexpected strength later this year amid decreasing oil prices and an expanding negative interest rate spread compared to the US. This resilience is noteworthy since these factors were predicted to weaken the currency, emphasizing the unpredictable nature of the foreign exchange market.”
Trader Mavyan shares his thoughts as well, “although I was expecting the USD to climb this year due to inflation-based market volatility, I was surprised that it remained so strong through much of the year. Tied to that volatility was also a consistent rise in precious metals prices, with gold in particular touching a high of $2,143 USD per ounce later in the year. That far surpassed the COVID-19 pandemic high of $2,080 USD per ounce.
What opportunities did our VBCE business customers take advantage of this year due to market volatility?
Trader Wong weighs in on opportunities he saw with his clients, “our exporters and companies receiving USD revenue definitely took advantage of the strong dollar this year as the loonie was generally one of the weaker performing currencies throughout most of 2023. With the market focusing on consecutive interest rate hikes from the FED going into 2023, reaching a 10-year peak in July - many took advantage of the strong dollar and exchanged or locked in forwards at yearly highs.
Trader Vitharana reflects on the opportunities his clientele saw and shares, “amid market turbulence, businesses with strong risk management strategies proved more adept at navigating challenges. I was able to play a pivotal role in supporting my clients' risk management by facilitating FX forward contracts. These contracts empower businesses to secure specific exchange rates for future dates, offering certainty and predictability. Such tools are particularly advantageous for businesses operating under tight budgets or constrained cash flows.”
Trader Mavyan saw that “most of my corporate clients are net-USD sellers, and so the strong USD this year was a great boost to them as they converted their USD income to CAD.”
Similarly, Trader Brown saw “the period of USD strength during October and November (USDCAD trading between 1.37 – 1.39) presented a great hedging opportunity for USD sellers. Forecasts at the time suggested a weaker USDCAD rate on average in 2024 with a Q4 rate of 1.3142.”
What opportunities did VBCE individual customers take advantage of this year due to market volatility?
Trader Wong saw his non-corporate, individual clients also take advantage of the volatility. “The strong US$ benefited a lot of immigrants moving here especially those with wealth largely denominated in USD. Those who were holding on to EUR and GBP savings throughout the drastic deprecation in 2022 as a result of the Ukraine/Russian war (lows of 1.2900 and 1.4070 respectively against the loonie), were finally able to sell as both currencies recovered to yearly highs (highs of 1.5100 and 1.7330 respectively against the loonie). Clients speculating in gold also took the opportunity to cash in as prices hit yearly highs again.”
Trader Vitharana assisted his individual clients in “shifting from stocks to gold in response to the instability affecting equity investments. Recognizing limited returns from stocks amid current volatility, they opted to sell part of their equity position. The decision to invest in gold proved wise as they were able to enhance the overall risk management of their portfolio as well as benefit from a global rise in gold prices.”
Trader Mavyan observed “some individual clients took advantage when needing to sell USD this year (for example, when receiving stock dividends, employer bonuses, etc.), but would also say that the volatility in precious metals prices drove many clients to purchase physical metals. The expectation amongst these clients is that their values will continue to climb, and so we see a lot of interest in precious metals not only as an investment, but as a hedge against inflation and economic ambiguity ahead.”
Trader Brown noted that for clients purchasing JPY, “the 3 month period between September – November saw the JPYCAD rate trade near 16 year lows on multiple occasions. Many clients had been waiting to repatriate their assets back to Japan. A common theme has been Japanese retirees selling Canadian property and moving back to Japan for retirement. Many clients effectively gained on the exchange as the JPY was much stronger (as much as 30%) when they originally immigrated to Canada and sold JPY.”
What, in your opinion, do you expect in 2024 for the currency market? What are you excited about?
Trader Brown expects “continued USD weakness in 2024 as economic data points to a slowing economy and lower interest rates. In the past 2 years, the U.S. raised interest rates more than any other central bank and they will likely drop rates further and faster than any other central bank.”
Trader Wong believes, “as consumer spending is expected to weaken in the short term and the lagged effects of the past rate increases really start to show going into 2024, I expect we will see the US and Canada begin their unwinding of the tightening we saw in 2022, albeit at a cautious pace. It will be interesting to see how well the FED and the Bank of Canada continue with their fiscal policy to ensure we avoid a recession. I’m excited to finally see a light at the end of the tunnel where growth and price stability will hopefully be normalized by the end of the year.”
Trader Mavyan considers, “tying in with any potential interest rate cuts next year, I would expect precious metals like gold, silver and platinum to move in the same direction as the USD—that is, if market volatility subsides, I think we can reasonably expect some lower precious metals prices as well. These past few years, we’ve tended to see the USD and precious metals move in the same direction together. If that is the case, I think it would definitely become a buyer’s market, so I’m excited to see how much interest we may see in precious metals as a result.”
Trader Vitharana anticipates “a sustained ascent in the precious metals market value throughout 2024. I'm eager to witness the extent of this rise, particularly against the backdrop of anticipated inflationary and geopolitical uncertainties expected to unfold in the coming year.”
FX and Precious Metals, looking ahead to 2024
Whether we see hawk or dove strategies next year we know that change is part of the economy. Being in business for over 30 years we’ve seen our share of swings in the market and we thank our Traders for their candid look back and thoughts for the upcoming year. Regardless of the ebbs and flows we find ways to support our clients as they navigate their needs.
VBCE wishes you a Happy New Year and prosperous 2024!