More volatilities for the global currency markets

From what we have seen so ffar,it is clear that president-elect Trump plans to use the threat of tariffs to draw concessions out of other countries. While this was the playbook used extensively during his first term in office, it is worth remembering that these were not idle threats as significant new tariffs were introduced and maintained, and even enhanced, by the Biden administration. Hence, it is wrong to view these as idle threats and that no new tariffs will be forthcoming once Trump gets into the White House next January. As the threats of tariffs keep coming, so they are likely to put a bid under the dollar.

However, the greenback won’t have it all its own way. Payroll data on Friday could represent a stumbling block for US dollar strength should the soft data that we saw last time be repeated for November. Payrolls rose just 12k in October, and, while the data were dragged down by strikes and hurricane anomalies, there did appear to be an underlying vulnerability. That’s a vulnerability that could not just keep a December rate cut from the Fed in play but also encourage the market to look for lower rates ahead, after the market has spent the past few weeks pricing rate cuts out of the futures curve.

The Standard Bank expected the balance of tariff threats on one side and Fed rate cuts on the other to tip towards a stronger US dollar for now, particularly given that the market does not know what sort of tariffs Trump will introduce when he takes office. But, over the long haul, the US dollar-boosting properties of any tariffs seem likely to be usurped by the dollar-draining effect of Fed rate cuts.

While the US dollar has remained strong against most currencies, it is euro/dollar that is the focus of attention given that the euro zone is witnessing political uncertainty of its own as the minority French government teeters on the edge. PM Barnier is threatening to force through the budget using a law that allows the government to do this even if it lacks sufficient parliamentary support.

However, the main opposition, the far-right National Rally (RN), is threatening to support the idea of a no-confidence vote later in the week should Barnier refuse the RN’s budget demands. If a no-confidence vote goes ahead and the government loses, it would put intense pressure on President Macron to resign his position. This is because new parliamentary elections cannot occur until next July as the rule states that elections cannot take place within a year, and the last election was earlier this July. Clearly the Barnier government could accede to RN’s demand but this would push the government further away from its aim of reducing the budget deficit to 3% of GDP, which is the mandated target from the EU.

The French deficit is around double the EU target and progress towards cutting this to 5% of GDP next year, as the Barnier budget implies, could be undermined if RN forces the government’s hand. With all this in mind, the key question for the market is whether these strains pose a real threat to the euro, or whether they can be brushed off.

In the Standard Bank’s view, they could prove difficult to dismiss and do pose a threat that euro/dollar could slide deeper into a 1.0-1.05 range over the reminder of this year and the early part of 2025, particularly if the dollar is being lifted by Trump’s tariff threats. But we also have to put this problem in context. For a start, RN is no longer a party that supports withdrawal from EMU, as was its forerunner the National Front.

Another point is that we have seen far-right parties come into power in the euro zone, in Italy, and, far from promulgating the rather fractured political landscape in the country, has actually proved not only quite stable, but able to make progress on some issues, such as migration that have so far evaded many other governments in the EU.

In short, we do not see this as a longer-term hurdle for the euro and we still look for euro/dollar to be back up to the 1.15 region against the US dollar in a year’s time even if a near-term flirtation with parity could be near. This being said, the Standard Bank believed that the euro’s recovery against the US dollar would not be mirrored by strength against many other currencies. Sterling, for instance, should continue to move towards the 0.80 level while the yen guns for 150.