Oil

We continue to see oil prices as rangebound, maintaining our 12-month forecast for Brent at US$75/barrel. The US presidential elections have had a limited impact on oil prices so far, mainly because it is unclear which of Trump’s policies – that could be consequential to oil markets – will dominate in the near term. A return to a maximum pressure strategy on Iran, with tougher enforcement of sanctions on Iranian oil, poses upside risk to oil prices. On the other hand, a clear shift towards a broad-based tariff agenda from the Trump administration could hurt global demand – a potentially bearish factor for oil prices.

If oil prices weaken, we expect OPEC+ to follow through with measures to try and prevent oil prices from falling excessively.

It is possible that the new Trump administration ushers in some looser regulations to promote drilling activity. But ultimately, US shale oil supply is likely to be a function of economics. The recent WTI oil price decline is set to disincentivise US drilling. If WTI oil price drifts down to US$60/barrel, US oil production will likely stagnate, while at US$50/barrel, it will outrightly decline under the current cost structure.

Precious metals

The strong US Dollar and higher US Treasury yields caused gold price to backtrack recently from its highs. Gold price and bitcoin price have moved in almost opposite lock-step direction since the US elections. But is unclear to what extent this is driven by prospects of more crypto-friendly regulations versus a reallocation from gold to bitcoin. We believe gold may be aided in the medium to longer term by some of Trump’s policies including tax cuts and tariffs hikes, which may bring economic and geopolitical challenges. We keep our 12-month gold price target unchanged at US$2,900/ounce.

As the policy priorities of the new US administration come into sharper focus in the coming months, Trump’s proposed tax cuts will likely raise further concerns about the US budget deficit. Nobody knows for sure how long it would take for investor to question the risk-free status of US Treasuries. But a marked rise in the debt-to-GDP ratio had led rating agencies (Moody’s and Fitch) to downgrade US debt in 2023. A further rise in the debt levels will worsen the fiscal situation and the appeal of US assets, likely to the benefit of gold. Tariffs straddle domestic economic and foreign policy. President-elect Trump indicated he will raise global tariffs on goods entering the US by 10-20%, with 60% on Chinese products. Tariffs of this magnitude would be inflationary and can be potentially stagflationary. Our study of regime investing shows that gold can shine as a risk diversifier in an inflationary environment.

Currency

The US Dollar (USD) index reached fresh highs in 2024 as markets continued to price in a less dovish US Federal Reserve (Fed), a possible return to US exceptionalism and policy uncertainty associated with Trump’s presidency. Fed Chairman Jerome Powell has said that the US central bank does not need to be “in a hurry to lower rates” and that the current strength of the US economy allows it to approach decisions carefully. Markets have also cut back on expectations of the Fed’s rate-cut trajectory for 2025. Trump’s presidency will have implications on currency markets as shifts in fiscal, foreign and trade policies look set to take place under Trump’s presidency. Markets are also warming to the idea that Trump may hit the ground running in January 2025, unlike in 2016 when he was less prepared. Trump’s threat of tariffs is clearly one of the major worries, as it can undermine global trade, world economic growth, investment sentiment and it may even pose inflation risks. We are of the view that there may be a USD pullback in 1Q2025 even as the Fed rate cut cycle continues, but USD risks and trajectory are skewed to the upside over 2Q-4Q2025, as we take into consideration the potential risk of tariff implementation and the slower pace of Fed rate cuts. Our medium-term view is still for the USD to trend lower. The USD’s overvaluation, alongside rising debt and the twin budget and current account deficits, are some drivers that should eventually weigh on the USD.

We are slightly bearish on the Euro’s (EUR’s) outlook going into 2025. Trump’s presidency will result in shifts in US foreign and trade policies, and they will have implications for the EUR. Universal tariff of up-to-20% can hurt Europe (if implemented) as the US is the EU’s top export destination. Growth in the Euro-area is also slowing. The yield differential between US Treasuries and European government bonds has already widened and may widen further amid shifts in market expectations for more ECB rate cuts versus fewer Fed rate cuts. Political uncertainty in Germany may also weigh on the EUR, although we expect this to come to pass. In terms of US foreign policy, military aid to Ukraine may dwindle when Trump takes over. He has on many occasions said that his priority is to end the war and stop what he described as a drain on US resources. Europe will have to take responsibility for its security and that would mean increasing defence spending – possibly adding to the fiscal burden for some EU nations. That said, the medium-term benefits of ending the war in Ukraine may also take away supply side pressure and help ease energy concerns. Overall, concerns of political uncertainty in Germany, policy uncertainties associated with Trump’s presidency, a softer growth momentum in the Euro-area and the potential widening of yield differentials between US and European government bonds, are some of the factors that may weigh on the EUR. But over the medium term, the EUR can revert to trending higher when growth stabilises, and political and policy uncertainties ease.

We are slightly constructive on the Pound’s (GBP’s) outlook. Growth continues to hold up and it is likely to be further supported by the UK budget while the labour market remains healthy. Employment growth improved and wage growth continues to outpace the headline inflation rate. Even as the headline inflation rate eases, services inflation remains sticky at 5%. This supports the case for a gradual pace of BOE rate cuts in 2025. The last policy meeting in November saw the BOE placing an emphasis on making sure inflation stays close to its target. This reinforces the view for a gradual approach by the BOE to removing restraint. That said, the near-term risks for the GBP are skewed to the downside, and this comes from external drivers – geopolitical uncertainties, broad USD strength, broader risk sentiments, etc. Other downside risks to our view include: (i) a more aggressive BOE rate cut cycle than the Fed; (ii) a faster growth slowdown in UK; (iii) a surge in energy prices; (iv) the Fed slowing down on policy normalisation and/or return of US exceptionalism. A play-up of any of these risks by markets may undermine the GBP.

We still look for the USD-Japanese Yen (USDJPY) to trend lower, premised on the Fed’s rate cut cycle versus room to further pursue policy normalisation by the BOJ. The BOJ is also expected to uphold central bank independence and Governor Ueda had earlier said that the current political situation in Japan wouldn’t stop him from lifting rates if prices and the economy stay in line with the BOJ’s forecast. On the data front, inflation rose recently Labour market data also pointed to upward wage pressure in Japan with (i) the jobless rate easing; (ii) the job-to-applicant ratio increasing; (iii) trade unions calling for another 5-6% wage increase at shunto wage negotiations for 2025. Wage growth pressure alongside broadening services inflation is supportive of the BOJ normalising rates further in 2025. Shifts in Fed-BOJ policies should bring about further narrowing of the yield differentials between US and Japanese government bonds - and this should underpin the broader direction of travel for the USDJPY to the downside. Elsewhere, escalation in geopolitical tensions may also support safe-haven demand (positive for the JPY). That said, any slowdown in the pace of policy normalisation - be it from the Fed or BOJ - would mean that the USDJPY’s direction of travel may be bumpy or face intermittent upward pressure.

We are broadly constructive on the outlook for the Australian Dollar (AUD) in the medium term on the back of: (i) the RBA keeping rates on hold for longer (it is the last major central banks to cut rates), given still sticky inflation, stronger consumer confidence & retail sales and the tight labour market; and (ii) expectations that China’s stabilisation story can find traction amid stimulus support, though some patience is needed. Although the Australian labour market remains quite tight, there are signs that the tightness is fading. Other labour market surveys such as the NAB employment index and ANZ job advertisements have been easing. This suggests that some normalisation in labour market conditions could be on the cards into 1H2025. Elsewhere, wage growth continued to ease to 2.5% in 3Q (versus 4.1% in 2Q). The trend of wage growth moderating is expected as labour market conditions ease. The RBA has also recently lowered its projection for the growth in the wage price index to 3.2% for end-2025 (versus its 3.5% projection previously). This adds to our conviction for the RBA to calibrate its monetary policy settings at some point in 2025 but it is not in any hurry to ease policy, given the still tight labour market and sticky services inflation. Our base case is for one 25 basis points (bps) RBA rate cut in 2Q2025 and another 25bps cut in 3Q2025. Key downside risk factors that may affect the AUD’s outlook are (i) the extent of swings in the Chinese Renminbi (if any); (ii) if the Fed under-delivering on rate cuts; (iii) the global growth outlook turning sour; (iv) any market risk-off events such as a potential escalation in US-China trade tensions or a commodity/tech sell-off.