We see some respite ahead for Asian currencies. Conotoxia fintech expects a steady long-term decline in the dollar and a broad-based rally in high-beta risky currencies, including EM FX. The LatAm FX's solid performance resulted from an attractive real rates story. High risk-adjusted carry acted as an anchor in a turbulent environment. As the dust settles on the bond market and the Fed is set to launch the inevitable easing cycle, investors may turn to undervalued laggards. China's lacklustre economic performance limits the scope for a strong recovery. A plethora of local elections and political risk events may also take its toll.
Nonetheless, Conotoxia remains positive on the INR, one of the best-performing Asian currencies in 2023. We expect the USD/INR pair to finally break below the recent floor at 83,00 and trend lower. The Indian economy is set to maintain solid momentum. RBI is set to stick to a hawkish stance and is expected to keep the key policy rate unchanged in the first half of 2024.
We see some significant upside potential for the won. KRW should be driven higher by a sustainable trade surplus and solid capital inflows, as interest rate differentials will become less of a problem when the Fed starts the easing cycle.
In the EM FX space, the CEE3 currencies might underperform. The CZK and HUF have a limited upside potential against the euro as their central banks will pursue sizable rate cuts. Despite its recent stellar performance, the zloty still has some room to run. The post-election policy mix, ending a conflict with the EU and imminent unblocking of the EU funds, paints a rosy picture for the Polish currency. We expect the EUR/PLN rate to return to pre-pandemic levels and drift lower towards 4.25.
Despite our bearish USD call, we doubt that the Mexican peso will be able to repeat its double-digit gains from 2023. With elections looming on both sides of the border and the threat of spillover from any US economic weakness, the USD/MXN exchange rate should trade flat as Banxico could start cutting rates before the Federal Reserve.