G10 currencies look set to remain becalmed

The US dollar retains a modest upward bias in trade-weighted terms and seems likely to play out the rest of the year in a pretty stable fashion. The only factor that could knock the US dollar out of its stride in the Standard Bank’s view is the looming Supreme Court decision on the legality of vast swathes of President Trump’s tariffs. It has consistently argued that country-specific tariffs are illegal. That’s what is being examined by the Supreme Court and a decision seems likely before the end of the year. However, if this is very late in the year, it is likely that FX market activity will be constrained by poor liquidity; something that could dull the response to the tariff decision.

In addition to the tariff decision, the Fed’s December 10th meeting could produce some volatility in the market given the uncertainty surrounding the outcome although many analysts doubt that this will generate a significant directional move in the greenback.

The Standard Bank forecasted, the key to the US dollar is not how much the Fed cuts, but whether it is perceived as the correct decision. It still harbour concerns that tariffs and tougher migration controls will keep inflation elevated. Add to this, the political pressure on the Fed from the Administration and the Standard Bank’s sense is that monetary policy factors will ultimately weigh on the US dollar. The US dollar might be static but some other G10 currencies are more volatile and could become far more volatile yet. This could be the case with the yen should the authorities decide that FX intervention is needed to stem the currency’s fall.

So far, it is only the Finance Ministry’s language that has been doing the ‘intervention’ as officials increase the pressure on the yen bears. But it is clear that physical intervention is needed to turn the tide and, even then, any impact could prove fleeting. Coordinating intervention with a BoJ rate hike at the December 19th meeting is one option, but we are not convinced that it is an option the Bank will take.

Another is to take advantage of thin market liquidity; something that will be in place over the US Thanksgiving holiday on Thursday. But, not surprisingly, the market also seems sceptical for, while implied volatility has risen, it has been quite modest and risk reversals have not shown any signs so far of being more heavily priced towards yen calls.

In short, it looks as if the recent trend of yen weakness will continue for a while yet. Sterling is another currency that has lent to the bearish side in recent months. This weakness could accelerate should Wednesday’s budget prove a disappointment. Perhaps fortunately, the Standard Bank believes that the budget will not lead to significant sterling weakness. The last time, the pound collapsed in the wake of a budget was back in September 2022 but that was because the Conservative-led administration decided to rip up the usual budget rules. Fast-forward to today and the difficulty for the government is that it is trying hard to work within the fiscal rules.

While the cost of this may be substandard economic growth and increased scope for the Bank of England to reduce base rates, the Standard Bank doubts that the fallout in the pound will be significant. In fact, such has been the pessimism surrounding the budget that there could be a relief rally in the pound once the budget details have been announced. But whatever the short-term reaction, the pound’s longer-term trajectory will depend largely on whether the UK economy can escape the paltry growth funk that has been present for many years now.

“We can’t say that we are particularly hopeful on this front. If we are right about this the pound may only be able to rise further against ‘weak’ currencies, like the yen and perhaps the dollar, but against most other currencies the outlook remains quite poor”, said the Standard Bank.