Trade the range in currencies and commodities

The Australian dollar (AUD) is our preferred currency, as the Reserve Bank of Australia should be one of the last major central banks to cut interest rates. Favorable fiscal and external account positions add to an attractive currency mix.

We also like the Japanese yen (JPY), as the Bank of Japan is tightening monetary policy and the authorities may step in to limit further yen weakness. That said, yen gains will likely be impaired by the currency’s negative carry, requiring investors to focus on exchange-rate momentum.

We expect the Chinese yuan to bottom out against the US dollar in the early part of 2024. Nevertheless, we see limits to any CNY rebound considering China’s structural challenges and ongoing geopolitical risks. We think this makes it hard for pro-growth currencies in Asia to perform, unless economic growth outside the region surprises very positively.

Risks to our view include the US economy continuing to exceed expectations and deliver robust growth. On the flip side, economic activity in the Eurozone or China could come under further pressure, preventing their currencies from reaping the benefits of a dip in US growth. Geopolitical risks also abound—any escalation could make the US dollar’s safe-haven characteristic shine again, likely only eclipsed by the Swiss franc.

Navigating currencies in 2024. For investors whose base currency is the US dollar, we think selling the dollar’s upside potential for yield pickup or selling it on rallies is an attractive strategy.

For investors based in the euro, the British pound, the Swiss franc, or select other currencies, we recommend finding range-trading opportunities in the crosses.

Meanwhile, we like the AUD from a carry perspective, and believe selling downside risks in the JPY, the Norwegian krone, and the AUD are appealing strategies from a spot risk and volatility perspective.

With GDP growth in 2024 likely staying subdued in China, hovering around zero in Europe, and slowing in the US, the potential for commodity price gains is relatively limited, in our view.

But total returns should be supported by yields on cash collateral and roll gains from downward-sloping futures curves in energy and parts of agriculture. These should add 1–2 percentage points per annum to broad index returns (based on the UBS CMCI index).

Overall, we expect broad commodity indexes to deliver positive returns over the next 12 months. We think this strategy provides an attractive risk-reward trade-off to investors who continue to hold their positions, while also providing some protection against geopolitical and weather risks that threaten supply.

Trading the range. We like strategies that take advantage of the trading ranges within commodities, selling the upside in some cases, and the downside in others.

In energy, oil prices have remained volatile in recent weeks. We think prices will move higher in 2024. On supply, we expect OPEC+ production cuts to keep the oil market in balance. But as demand growth is likely to slow in many developed economies, we believe it will be a balancing act for OPEC+ to avoid oversupply, rising inventories, and falling prices. OPEC+ spare capacity led us to trim our oil price forecasts for 2024, but we expect Brent to trade in a range of USD 80–90/bbl and WTI between USD 75 and USD 85/bbl this year. We recommend investors with a high risk-tolerance to sell Brent’s downside price risk or add exposure to longer-dated Brent oil contracts that trade at a discount to spot prices.

We anticipate gold prices reaching USD 2,250/oz by the end of 2024. With Fed rate cuts likely to materialize in the second quarter, we should see ETF demand for gold turning positive. We believe investors should add fresh long positions if the gold price falls below USD 2,000/oz.