The process of decoupling from China is hastening amid growing geopolitical tensions, something that is bound to have implications for USD/CNY exchange rates.
This could be further complicated, as Xi Jinping looks to diversify his country’s economy, a process that is expected to result in China generating more than one-quarter of all global consumption growth – more than any other country.
How the Chinese Yuan will subsequently look against the US Dollar seems all the more uncertain.
Shifting trade conditions are not endemic to just China and the US, Europe has introduced the EU Carbon Border Adjustment Mechanism (coming into force in 2026) to penalise high-carbon imports which, according to Energy Monitor, is likely to have the biggest impact on Russia. Over US$10bn of its largely iron and steel exports between 2015 and 2019 would have fallen under this new CBAM legislation.
Of course, the key driver in these shifting trade conditions is the result of geopolitical decisions and the key role politics plays in economic issues that affect FX rates. And in 2024, some big political events could alter economic outlooks, thus fuelling exchange rate volatility.
No upcoming political event is perhaps as large as the impending 2024 US election, where it is expected that incumbent President Joe Biden will again face off with Donald Trump, the likely Republican candidate.
The outcome of this election could have vastly different geopolitical implications. For instance, would another Trump administration roll back any of the severe economic sanctions on Moscow that ensued after Russia invaded Ukraine in 2022?
Such is the polarity in today’s political sphere that the impact of elections on the economy is arguably more unpredictable than ever.
History backs this up. Since 1980, only six of the US’s Congressional 21 sessions (29%) have been led by a unified government, leading to higher policy uncertainty.
Add to that Donald Trump’s 2016 election win, the US-China trade war and pandemic-led economic policy responses, and the polarity only grows. The Global Economic Policy Uncertainty Index has already reached record levels near 435 in 2020 (versus 196 in 2010) and it has never really normalised to pre-pandemic levels.
Such political conditions are not constrained to the US alone either – they are global.
Take the UK, where the British pound collapsed in 2022 because of then-Prime Minister Liz Truss’ poorly received economic recovery plan. And the UK could see further economic shifts in 2025 at the time of its next general election.
That is if it does happen in 2025. There are suggestions current Prime Minister Rishi Sunak could pull this timeline forward should the UK economy remain on a resilient path. And should the British public vote in the Labour Party after more than a decade out, there is a chance this could alter UK-EU trade and business relations.
The scope for election-driven economic uncertainty is everywhere in 2024, with key elections happening in Mexico, South Africa and the EU. There is uncertainty around the election of a new European Parliament in 2024, with far-right candidates gaining traction in recent months.
Could far-right candidates, if successful, reshape the European landscape for climate policy and lead to a more conservative Brussels?
This adds to today’s economic picture of disparity and uncertainty. The changeability of political policy and shifting trade allegiances, alongside a lag in the pinch on credit, and a divergence between bonds and equities points to an uncertain economic outlook, one which could unpredictably affect FX rates globally.
Most forward-looking indicators – like the Purchasing Managers Index, the Conference Board’s Economic Index, and yield curves across government bonds – point to high recession probabilities in 2024, while backward-looking indicators continue to perform well.
The last four recessions have been preceded by circumstances that are currently in place, such as tighter US Federal Reserve monetary policy, the New York Federal Reserve’s recession probability indicator rising above 30%, the Conference Board’s US Leading Economic Index falling below -5, over 50% of US bond yield curves inverting, and the US’ CEO Confidence Index falling below the key 40 threshold. Nevertheless, consumer spending has remained resilient and global stocks have appreciated, with the Nasdaq surging.
So, amid the divergence and uncertainty today, what outcomes should we expect in 2024, and how could these potential outcomes affect FX rates?
Get a copy of our full report: Are you ready for 2024?
In our full report, we’ll provide an even more comprehensive outlook for 2024, looking at how key markets will be affected in our FX rates analysis and forecast scenarios and recommendations for crossborder businesses looking to successfully navigate international trade as we enter 2024. Register here to receive a copy of our full report, launching at Money2020 US on October 23rd.
