Gold’s performance this year has been exceptional, gaining 25% through April 23 close and surpassing the returns of other major asset categories. This surge has fueled bullish forecasts and renewed debate about gold’s role in portfolios. The rally has been underpinned by the Trump administration’s trade policies, which have heightened fears of a global economic slowdown, a rise in US inflation, and the potential for greater declines in the dollar. These risks have motivated investors to turn to gold as a potential hedge.

Historically, the dollar’s performance has had a negative correlation with gold. Since 2000, when the trade-weighted dollar has declined by more than 3% in a quarter, as it did in first quarter 2025, gold has averaged a 7% quarterly return. If the economic landscape deteriorates further due to protectionist policies, a decision by President Donald Trump to undermine the independence of the Federal Reserve, or some other issue, it could add pressure to the dollar and support greater flows to gold.

However, there are several key reasons why gold’s future performance could disappoint. First, gold recently touched its highest inflation-adjusted price ever, reaching $3,500 per troy ounce. This tops the real price that it reached in 1980. From these levels, gold’s momentum could be due for a reversal. History offers cautionary lessons after gold’s cyclical peaks: after surging during the stagflationary 1970s, gold lost 62% of its value in just 2.5 years when the Fed tightened policy. More recently, gold declined by 30% in 2012–13 after a rapid run-up during the Global Financial Crisis.

Second, much depends on the persistence of US political uncertainty and investor sentiment. If the Trump administration pivots toward more pro-growth policies, de-escalates tariffs, or restores confidence in the dollar, gold’s safe-haven appeal could diminish. In recent days, we have seen indications of US progress toward trade agreements with India and Japan, and signs that tariffs on China may be lowered. Moreover, recent bond market volatility appears to have prompted the Trump administration to adopt a more conciliatory approach on trade policy, likely in an effort to reassure investors and restore market stability.

Third, central bank demand may no longer provide the same structural support to bullion prices that supported gold’s rally in recent years. Central banks ramped up gold purchases around the time of Russia’s 2022 invasion of Ukraine, but buying has since stabilized at high levels. If this trend continues, ongoing central bank demand should still help underpin prices, though the market’s adjustment to higher purchase levels means the marginal impact of further buying is likely to be less significant than during the initial surge.

With gold now trading near record inflation-adjusted highs and bullish sentiment widespread, the risk of a significant pullback is elevated. History reminds us that rapid price gains can quickly reverse, especially if investor sentiment shifts or US policy uncertainty abates. For most investors, this may be an opportune moment to realize gains rather than initiate new allocations. For some investors—for instance those with significant unhedged US dollar exposures and liabilities denominated in another currency—it may be prudent to delay rebalancing gold allocations. Maintaining these positions could provide a hedge if uncertainty increases, though this approach may forgo some of the gains embedded in gold allocations within the portfolio. Ultimately, the decision to hold or trim gold should be grounded in a number of factors, including the asset owner’s currency exposures, risk tolerance, and other portfolio holdings.

Sean Duffin, Senior Investment Director, Capital Markets Research

The post Is Gold’s Rally Sustainable? appeared first on Cambridge Associates.

Having outgrown its Eurozone peers in the 12 to 15 years since the Global Financial Crisis, continued US economic outperformance was unsurprisingly anticipated this year. As of the end of February, the consensus expectation for 2025 GDP growth was 2.3% for the United States versus 0.9% for the Eurozone. However, recent US tariffs have disrupted these forecasts, impacting global growth and inflation expectations. The growth impact outside the United States will depend on how long the announced tariffs are in place, the degree of demand destruction, and the extent of any retaliation. In contrast, the uncertainty for US businesses and consumers seems likely to weigh substantially on growth even before the direct impact of the tariffs is felt. As a result, growth expectations have converged, with latest forecasts projecting economic growth of 1.7% for the United States and 0.8% for the Eurozone this year.

Even before this, however, structural change was afoot within Europe. Germany’s pivot from fiscal orthodoxy to significant infrastructure and military spending, alongside the EU’s push for increased defense budgets, signal a proactive response to weak growth and geopolitical changes. At the same time, the Trump administration has vowed to reduce the US budget deficit. While the running deficit is actually up on the year so far, there appears to be limited room to meaningfully expand the current 6%+ deficit. Furthermore, the inflationary impact of tariffs in the United States may frustrate the swiftness and extent with which the Federal Reserve can provide support. By contrast, inflation in Europe is closer to target, while US tariff policy should prove disinflationary for the region. All told, Europe should have more policy flexibility to mitigate the impacts of the tariff regime. Therefore, further convergence in expected growth rates look more likely as the year progresses.

Consistent with this, the US equity market has underperformed its peers this year, with the challenge to US growth conditions from tariffs serving as the catalyst. However, it has not been just those sectors with the greatest direct exposure to tariffs that have underperformed the most, but also the most richly valued companies, which have a large weight in US indexes. Clearly, recent policy volatility is not consistent with the broadly accommodative macro conditions that are required to keep valuations near historically elevated levels. Despite recent declines, growth stock valuations remain elevated compared to the broader market. As a result, we continue to recommend that investors moderately tilt towards developed markets value equities, which offer a margin of safety. The resulting modest overweight to ex US equities reflects the growing importance of regional diversification as US capital attraction faces policy-driven challenges.

While there is some underlying diversity in US equity exposures, namely across different sectors (even if somewhat diminished recently) and globally derived revenues, one of the most concentrated exposures in many portfolios is the US dollar. Given the US weight in both public and private markets, as well as some alternative strategies, it is not uncommon for European portfolios to have an exposure of 40%–50% to the US dollar. Thus far, investors have been well served by their dollar exposure. It has both been in an uptrend for the past 14 years and acted as a partial hedge for portfolios, reliably rallying when risk assets declined. There are reasons to question whether these trends for the dollar will continue. As the US dollar valuation reapproached its most extended levels in recent months, we believed that growth and interest rate convergence between the United States and its peers was likely and presented downside risks for the greenback. We continue to hold this view, and now add to the list of drivers a potential structural reduction in demand for US assets prompted by evolving trade and geopolitical policies.

What’s more, the United States has been the source of the recent market volatility, with fears of its economic underperformance and foreigners’ desire to repatriate capital depriving the dollar of its risk-off qualities. If future bouts of volatility also originate from, or are centred on, the United States, it may continue to disappoint as a hedge. Similarly, it may turn out that recent US policy actions end up accelerating what has been the glacial erosion of the dollar’s dominant reserve currency status. Therefore, if in times of stress, foreign investors come to view the United States as a funding source, rather than a destination for capital, the dollar may behave differently than in times past. This, of course, is not pre-ordained, but the subjective probability has increased. For now, as the dollar remains the dominant currency of trade and account, it retains the capacity to appreciate in the event of a global dollar funding squeeze. A reversal in current tariff policy could also see the dollar gain some short-term support.

There is no one-size-fits-all approach to dealing with concentrated positions within portfolios. Broader diversification can help reduce risks tied to a single economy. Reducing overall US dollar currency exposure—whether through greater domestic currency investment or increased currency hedging—may also improve diversification, though each approach involves its own opportunity and explicit costs. Furthermore, such decisions cannot be taken in isolation, as they are inherently linked to other portfolio decisions, such as the size of safe-haven bond allocations and other diversifier allocations. Overall, awareness of exposures, understanding how they may behave in different environments, and diversifying those that present excessive risks remains key to prudent portfolio management.

Thomas O’Mahony, Senior Investment Director, Capital Markets Research

The post US Policy Changes Highlight Need for Portfolio Diversification appeared first on Cambridge Associates.

The US Dollar Rally Should Cool in 2025

Aaron Costello, Head of Asia, and Vivian Gan, Associate Investment Director, Capital Markets Research

We expect the US dollar to continue to strengthen in early 2025 but weaken modestly in late 2025 due to moderating US economic growth, Fed rate cuts, and lingering overvaluations. However, the dollar may be volatile, given uncertainty over US fiscal, trade, and monetary policies, as well as the dollar’s tendency to rally amid periods of market stress.

Indeed, the US dollar has rallied 4.9% over October and November, with the market viewing Trump’s trade and fiscal policies as potentially boosting US growth and inflation. As a result, markets have pared back Fed rate cut expectations, which have boosted US bonds yields and supported the dollar’s recent rally. At the same time, markets are also expecting that the Trump administration will increase tariffs on US imports, which would put downward pressure on other currencies and support the dollar.

Despite the above, the US dollar could still weaken in 2025 if US growth slows while growth in DM ex US accelerates as implied by consensus forecasts. ¹ While tariffs may place downward pressure on growth outside the US, a slowing US economy would still see Fed rate cuts, therefore reducing support for the dollar. Furthermore, should China’s stimulus gain traction and China reflation take hold, EM growth should pick up, and the US dollar may weaken against EM currencies.

Overall, valuations for the US dollar remain very elevated, which imply the currency should face downward pressure in the medium term. To the extent that markets have priced in a reflationary backdrop, continued dollar strength will require further upside growth surprises in the US, which may not occur. Therefore, while the US dollar may continue to appreciate in the near term, we still expect the currency to lose steam in 2025 as US growth trends lower and as the Fed continues to ease policy.

Gold Returns Should Moderate in 2025

Sehr Dsani, Senior Investment Director, Capital Markets Research

Gold prices are at their highest levels in more than 50 years. In 2024, prices surged nearly 30%, ranking as one of the top returns in history. Several factors supported the rally, including its function as a store of value and its appeal as a safe-haven asset during geopolitical unrest and market uncertainty. We think some of these drivers will likely remain in 2025. However, we doubt returns in 2025 will be as lofty as in 2024.

Investors often turn to gold as a store of value to protect against declining yields. However, with monetary easing widely telegraphed, many investors have already positioned for lower yields, making it unlikely to be a significant source of new gold demand in 2025. Similarly, our expectation that key inflation rates will continue to moderate back to central bank targets, albeit in bumpy fashions, may also reduce investor demand. This is also true for central banks, many of whom increased their gold reserves materially in recent years.

Investors also flock to gold in uncertain times. This has occurred around recessions; for instance, gold prices rose as the GFC began, up 45% year-over-year by early 2008. Geopolitical unrest can also drive gold higher, as occurred on 9/11, when prices were up 6%. However, it is rare for prices to remain elevated. Still, geopolitical risk may remain high, given the many existing conflicts, weak relations between the West and China, and the potential for protectionist US policies. But, to some extent, these factors are embedded in prices. With gold prices at all-time highs, we think gold is likely to lag its impressive 2024 return.

Emerging Markets Crypto Use Should Support Positive Crypto Returns in 2025

Joseph Marenda, Head of Hedge Fund Research and Digital Assets Investing

Crypto and blockchain usage hit an all-time high in 2024, driven by 617 million crypto owners globally and 220 million active crypto addresses. The five-year compound annual growth rate for crypto ownership is 99%. What is driving adoption and usage? Many factors, but in 2024 stablecoins found product market fit, particularly in EM countries. Stablecoin use in the crypto economy and real world will be a major driver of the crypto market in 2025.

Invented about ten years ago, stablecoins are digital equivalents of US dollars (or any currency, but 99% of stablecoins are USD backed) that exist on a blockchain. When a user buys a $1 stablecoin, the issuer typically buys $1 of US government debt. In 2018, the market capitalization of stablecoins ranged from $1 billion to $3 billion. Today, stablecoin issuers cumulatively are the 19th largest holder of US debt at $120 billion, more than Germany’s holdings. The growth occurred as stablecoins were increasingly adopted by non-crypto users in EM countries.

Stablecoins have many uses outside of crypto transactions, including as a means of savings, cross-border payments, remittances, and corporate cash management, regardless of country. Emerging markets, in particular, use stablecoins for these activities. With a growing userbase across emerging markets, blockchain protocols and crypto companies are developing USD-based investment products and financial services that will be available globally. This growing pool of USD stablecoins will help drive investment opportunities for crypto VCs, traditional investment managers, and traded blockchain tokens in 2025—making “digital dollars” the dominant use case for blockchain in 2025 and laying the groundwork for global financial systems innovations in 2025 and beyond.

Figure Notes

Real Exchange Rate Valuations for the US Dollar Are Stretched
Trade weights for the US dollar are based on the following: Euro (41.4%), Canadian dollar (27.5%), Japanese yen (11.0%), British pound (10.0%), Swiss franc (6.1%), the Australian dollar (2.7%), and Swedish krona (1.2%). Totals may not sum due to rounding. 2024 inflation data for Australia are through September 30, Eurozone are through November 30, and all others are through October 31.

Gold Returns Rarely Exceeded 30% in Consecutive Years
Real prices are inflation-adjusted. Inflation data are through October 31, 2024. Returns for 2024 are through November 30.

Stablecoin Transaction and Transfer Volume Is Similar to Visa and Mastercard Combined
Data are aggregated.

Footnotes

1. Please refer to the Economic Outlook Map.

The post 2025 Outlook: Currencies appeared first on Cambridge Associates.

Over the last four years, the Japanese yen has consistently weakened, experiencing a 34% decline against the dollar since the end of 2020, and comparable depreciations against the euro, UK sterling, and Swiss franc. Currently, the yen’s real effective exchange rate is at its lowest since December 1971, standing at the 4th percentile of observations since 1970, with a 36% undervaluation compared to its historical median.

Widening interest rate differentials between Japan and its peers lie at the heart of this broad depreciation. The COVID-era inflation surge occurred earlier in other markets, which resulted in central banks raising rates aggressively in those regions. Meanwhile, the Bank of Japan (BOJ) maintained monetary policy at extremely accommodative settings for a prolonged period as a result of both a delayed exit from lockdowns and secularly low domestic growth. Indeed, they have only recently exited what may be termed ‘emergency settings’ by ending their explicit yield curve control policy and taking rates out of negative territory.

Japan’s first quarter GDP contraction of 0.5% suggests near-term policy tightening is unlikely. Nonetheless, with policy rates in peer regions at cyclical highs, and limited room for the BOJ to ease, a narrowing of interest rate differentials is the probable direction of travel. Most developed markets (DM) central banks are likely to reduce rates from their current restrictive stances and bring them back towards a more neutral level. When weak growth in certain regions is added to the equation, that potentially accelerates the timeline over which easing will occur. This process has already begun in Switzerland and Sweden and may kick off in the Eurozone and United Kingdom as soon as next month. The muted pricing in of cuts in the United States also points to the potential for a narrowing of rate differentials. What’s more, Japanese authorities have shown intent to intervene to strengthen the yen when it has approached 160 to the US dollar, a level that is approximately 2% away.

The weakening yen has provided a dual benefit to Japanese companies’ earnings. It has enhanced the competitiveness of exporters by making their goods and services more affordable internationally, and it has boosted earnings directly through the favourable translation of foreign revenues back into yen. This earnings backdrop has driven strong local currency outperformance. However, for non-Japanese investors, the impact of holding assets denominated in a depreciating currency has largely neutralised these local currency gains, resulting in a performance that is broadly flat when measured in US dollars. Hedging out yen currency risk has worked well in this environment, with local currency outperformance supplemented by positive carry from the hedge. While this can persist with a weakening or range-bound yen, such a position is exposed to a sharp strengthening of the currency. The EPS tailwind would become a headwind, without the benefit of the strengthening yen as an offset.

While we do not foresee Japanese equities continuing to benefit from a weakening yen, and relative valuations are not compelling, other factors may continue to serve as tailwinds. Foremost amongst these are the reform efforts being promoted by the Tokyo Stock Exchange (TSE) to improve capital efficiency and corporate transparency. Corporate engagement with these efforts has surpassed prior instances of attempted reform, with 57% of TSE Prime listed companies now having disclosed their planned initiatives. The actual and expected tangible results of these reforms include the increased return of capital to shareholders via dividends and buybacks, a reduction in cross-shareholdings, and a continued increase in the proportion of independent directors on boards. Additionally, a trebling of the Nippon Individual Savings Account allowance, which allows residents to invest in financial assets tax free, should be a source of greater inflows into domestic equities.

The TSE reform initiatives especially should be of particular benefit to Japanese small caps. Therefore, while we remain neutral on Japanese large caps, we see conditions in Japan as a tailwind to our DM ex US small-cap position, which counts Japan as its largest regional exposure.

Thomas O’Mahony, Senior Investment Director, Capital Markets Research

Footnotes

1. Please refer to the Economic Outlook Map.

The post Will the Yen Continue to Support Japanese Equities? appeared first on Cambridge Associates.

The rallies in both bitcoin and gold since last fall have certainly been noteworthy. Bitcoin fervor has returned, owing to two factors. First, the SEC approved spot bitcoin ETFs in January, making it easier for investors to access and triggering significant investment inflows. Second, the anticipation of bitcoin’s fourth “halving” event, which will decrease the rate of new bitcoins entering circulation, sparked speculation that the fair value of bitcoin exceeds its recent price. The digital currency reached $73,000 by mid-March, surpassing its November 2021 high. It climbed 190% trough-to-peak since its September low, representing the ninth time that bitcoin has seen a price increase of more than 100% without a significant price reversal during the run-up. ²

Gold’s surge has been driven by geopolitical tensions, an uptick in central bank purchases of gold, and the decline in the US ten-year Treasury yield. On the latter, the US ten-year Treasury yield has declined by roughly 70 basis points to 4.3% since mid-October, which has decreased the opportunity cost of holding gold. As a result, gold gained 10% over that same period and is currently near an all-time high of just under $2,200/troy ounce. This has been a sharp rally by gold’s standards.

But focusing on prior rallies is only half of the story. After each of the prior eight episodes when bitcoin gained more than 100%, it experienced a median drawdown of 30%, which often happened in less than a month. It is also worth noting that bitcoin plummeted 77% in just over one year after reaching its last peak of around $68,000 in 2021. Gold’s drawdowns have been fewer and smaller in magnitude. Still, since 1990, it has seen nine drawdowns with a median of -22%, and these drawdowns occurred after gold had rallied by around 40%.

Still, we view bitcoin and gold as different investments. We see bitcoin as highly speculative, and we believe it will behave like other risk assets in a market downturn. In contrast, gold has a more proven track record as a reliable haven instrument, meaning it may perform well in a risk-off scenario.

All this is to say that these rallies in bitcoin and gold may be overextended when viewed with a historical lens. At the very least, investors choosing to add either asset should size positions modestly, understanding that rapid price swings are likely to persist. Recent price action in bitcoin furthers this point; in the week since it reached its all-time high, it saw a 15% pullback in its price. For those investors thinking of adding gold as a potential source of portfolio protection, we favor long US Treasury securities, which also offer that benefit and include the added bonus of a healthy yield.

Sean Duffin, Senior Investment Director, Capital Markets Research

Footnotes

1. Please refer to the Economic Outlook Map.
2. Each price increase is determined by looking at periods during which bitcoin’s price increased without a 20% price reversal.

The post Should Investors Chase the Bitcoin and Gold Rallies? appeared first on Cambridge Associates.

Bitcoin ETFs are unlikely to impact sophisticated investors in the near term because few are interested in exposure and those that are interested in the space may already have exposure to bitcoin-only or broader crypto asset closed-end funds, which have existed for years. Still, retail flows to these bitcoin ETFs will likely be substantial. These flows will improve the market’s depth, increase options and futures activity, and attract more hedge funds to the space. As a result, sophisticated investors may acquire modest exposures to the space over time via existing hedge fund exposures.

The approval of bitcoin ETFs does not signal a shift in the SEC’s skeptical attitude toward crypto assets, and the broader regulatory environment in the United States remains cloudy. The United States lagged some countries in spot bitcoin ETF trading, but it is ahead of other jurisdictions. On broader crypto regulations, the United States is behind the EU, and some countries in the Middle East and Asia. We do not expect any changes in the US regulatory situation until after the 2024 election, if at all.

Investors targeting bitcoin exposure will have to decide whether to hold the asset directly or via an ETF, much like the dilemma gold investors face. Those investors that prefer to hold gold bullion will likely also prefer to hold bitcoin directly. But, as with gold, investors will need to decide if a speculative bitcoin investment makes sense in their portfolios.

Joe Marenda
Head of Hedge Fund Research and Digital Assets Investing

Footnotes

1. Please refer to the Economic Outlook Map.
2. Each price increase is determined by looking at periods during which bitcoin’s price increased without a 20% price reversal.

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The US Dollar and Gold Should Hold Their Value in 2024

Sean Duffin, Senior Investment Director, Capital Markets Research, and Thomas O’Mahony, Senior Investment Director, Capital Markets Research 

The US dollar and gold are both stores of value and tend to do well in periods of turmoil. Despite this reality, as well as our views that economic activity will be weak in 2024 and that equity market volatility will increase, we expect that prices of these assets will remain range bound.

The dollar’s best days are likely already behind it for this currency cycle, following the run-up that climaxed in September 2022. Looking forward, the path of least resistance for the greenback over the next five-year period is for it to depreciate from its current elevated real valuation. The currency is currently benefiting from wide interest rate differentials versus its peers, expectations of continued US economic outperformance, and risk aversion. The unwinding of any of these factors against a more normalized macroeconomic backdrop could precipitate dollar weakening.

Nonetheless, it may be premature to expect these supportive factors to dissipate in 2024. Consensus US growth outperformance versus the Eurozone and United Kingdom for 2024 is relatively modest and could improve, given the headwinds Europe faces. Relatedly, the Fed likely has the strongest claim to genuinely needing to keep rates higher for longer. And even if conditions in the United States continue to deteriorate, the flight-to-safety effect the US dollar enjoys may initially mitigate the impact of reduced growth and rate differentials. Therefore, 2024 looks more likely to deliver bounded dollar performance than a surge higher or lower.

Like the dollar, we expect gold’s performance will not stand out. Recently, geopolitical tensions and central bank buying have supported its price, but we believe its recent rally likely means that it is already pricing in an uptick in geopolitical risk and market volatility next year. With real yields now trading at their highest levels since the GFC and our view that the Fed will only modestly cut its policy rate in 2024, the opportunity cost of holding a non-interest-bearing asset like gold will remain high, making tactical gold positioning funded from assets like cash more difficult to tolerate.

There are several catalysts that could spark another strong year of performance for both gold and the dollar, such as unexpected escalation in geopolitical conflicts or an equity market meltdown, but we consider those catalysts as tail risks.

The Yen Should Appreciate in 2024

Thomas O’Mahony, Senior Investment Director, Capital Markets Research 

The Japanese yen has weakened persistently since the beginning of 2021. Indeed, the most recent sell-off has taken the valuation of the yen to historically cheap levels. Our calculations show the currency’s real valuation versus the dollar is lower than 99% of observations back to June 1971. Monetary policy divergence lies at the heart of the yen’s decline. The post-COVID surge in inflation occurred sooner and more forcefully among Japan’s peers, with material monetary tightening being delivered. Japan, by contrast, maintains a negative policy rate.

The rise in inflation in Japan is undeniable, however, with Bank of Japan (BOJ) core inflation (excluding fresh food and energy) currently at 4.0%, the highest since the early 1980s. The only response so far from the BOJ has been to widen the bands of its Yield Curve Control (YCC) ³ policy. The relative lack of wage pressure has so far stayed the BOJ’s hand, as it retains concerns about the persistence of current inflation rates. Nonetheless, wage pressures are at the high end of the range of the last three decades and the labor market looks tight by most metrics. With core inflation having been above target for nine months and economic activity coming in firmer than in most of its peers, pressure is likely to build in 2024 for further monetary tightening.

While any further BOJ tightening is likely to be modest in comparison to other regions, it should be sufficient to drive some yen appreciation. It would reduce the currency’s negative carry, making it less onerous for those wishing to express a positive JPY view, and less beneficial to those using the yen as a funding currency. There are, of course, scenarios in which the BOJ does not deliver any further tightening. One of the most likely would be in the event of a more severe global economic slowdown. However, in this scenario, other central banks would be aggressively cutting interest rates, causing interest rate differentials to move favorably for the yen. While other scenarios could play out, the balance of risks appears skewed toward an appreciating JPY in 2024.

The Crypto Winter Should Transition to Spring in 2024

Joe Marenda, Head of Hedge Fund Research and Digital Assets Investing

Digital assets were in a so-called crypto winter from mid-2022 to late 2023. Crypto winters are bear markets when crypto prices and private valuations are depressed for extended periods. While episodic, this is the fourth such winter since the inception of the crypto markets. We expect a crypto spring will arrive in 2024, given recent price dynamics among some cryptocurrencies, recent regulatory developments in many key markets, and continued growth in both adoption and in the technology’s utility.

Prior crypto winters have been periods of innovation. Major technical advances and new use cases have followed prior winters. During this winter, progress has been made in core technologies that will make blockchain faster, cheaper, and more capital efficient. As a result, the prices of a few larger cryptocurrencies have performed well in 2023.

A hurdle for cryptocurrencies has long been its regulatory footing, but many jurisdictions have developed clear regulatory frameworks. These markets include the United Kingdom, European Union, United Arab Emirates, Singapore, Hong Kong, South Korea, Thailand, and Japan. While US regulatory clarity and banking access remains cloudy, the stars are potentially aligning for the first US spot Bitcoin exchange-traded fund to be approved by regulators in 2024.

Cryptocurrency usage has also continued to broaden, which we expect will support a spring transition in 2024. One important area involves US dollar–backed “stablecoins” that allow anyone, anywhere to hold US dollars outside of their national banking system using only their cell phone, regardless of what a government might restrict. In late 2023, stablecoins had an aggregate market value of approximately US$130 billion, up from US$3 billion in 2018. Established companies have noticed the promise of stablecoins, with PayPal launching its own stablecoin in 2023. ⁴ For investors focused on new markets driven by new technology, 2024 may be a good entry point as the next crypto spring commences.

Footnotes

1. Please refer to the Economic Outlook Map.
2. Each price increase is determined by looking at periods during which bitcoin’s price increased without a 20% price reversal.
3. Under yield curve control, a central bank commits to buy whatever quantity of bonds is necessary to keep yields at their target level. In practice, the BOJ operated YCC with an allowance band on either side of its central yield target.
4. In November 2023, PayPal received a subpoena from the US Securities and Exchange Commission requesting documents on its stablecoin.

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• The Federal Reserve held its policy rate constant at 5.25%–5.50% but indicated in its summary of economic projections that interest rates would need to be held tighter relative to its last projection in June. For instance, the Fed now believes it will only cut interest rates by 50 basis points (bps) in 2024, relative to its prior projection of 100 bps in cuts, due to a stronger outlook for economic growth.
• The Bank of England held its benchmark policy rate unchanged (5.25%) for the first time in nearly two years in a finely balanced decision. The lower-than-anticipated inflation print for August, along with weak PMI and GDP reports, gave the central bank cover to pause rate hikes as those increases already delivered appear to be having a material impact on the UK economy.
• The European Central Bank increased its benchmark deposit rate 25 bps to 4.00%, its highest levels since the euro was created in 1999. However, the central bank cut its economic growth outlook and hinted that it is prepared to halt further rate increases with growth in the region seemingly on shaky foundations.
• The BOJ continued to stand apart from its peers, making no changes to its ultra-loose monetary policy and continuing to hold its benchmark rate at -0.1%—the only country in the world to maintain a negative target rate. BOJ Governor Kazuo Ueda noted that the central bank must “patiently maintain” this dovish stance until inflation sustainably reaches their 2% target, which they have yet to see.

The GBP, EUR, and JPY all sold off vis-à-vis the USD as the market priced in a slightly stronger economic and interest rate backdrop in the United States. Equity markets broadly retreated as investors reacted negatively to the announcements. Looking forward, we do not think investors should be short duration relative to their benchmarks, given the support it can provide to portfolios if economic activity slows more than expected. We believe the risks to high-quality government bonds are tilted toward yields moving lower over the next 12 months.

David Kautter
Associate Investment Director, Capital Markets Research

Thomas O’Mahony
Senior Investment Director, Capital Markets Research

Footnotes

1. Please refer to the Economic Outlook Map.
2. Each price increase is determined by looking at periods during which bitcoin’s price increased without a 20% price reversal.
3. Under yield curve control, a central bank commits to buy whatever quantity of bonds is necessary to keep yields at their target level. In practice, the BOJ operated YCC with an allowance band on either side of its central yield target.
4. In November 2023, PayPal received a subpoena from the US Securities and Exchange Commission requesting documents on its stablecoin.

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