By Jamie McGeever
ORLANDO, Florida (Reuters) -An extraordinary year for investors is about to end with a bang on the monetary policy front, with almost every G10 central bank set to make interest rate decisions over a 10-day period this month.
Four of the G10 central banks are meeting this week and five, including the Federal Reserve, are meeting next week. Remarkably, four of these – the Bank of Japan, the Bank of England, the Riksbank and the Norges Bank – will announce their policy statements on the same day, Thursday 19 December.
The series of decisions and directives will be most acutely felt in the currency markets, where implied volatility in G10 currencies is already at its highest level since April last year.
Importantly, most of these currencies will be going into these meetings in the background. The pound sterling is the only thing that has managed to hold its own against the dollar this year, and even then only barely. All other G10 currencies are between 4% and 9% weaker against the dollar in 2024.
It’s easy to see why implied FX ‘full’ is so high at the end of the year. Uncertainty about US trade policy following Donald Trump’s election victory, rising geopolitical tensions and the ebb and flow of monetary policy expectations are all playing a role.
In this regard, in addition to the nine G10 central banks mentioned above, monetary policymakers in Brazil, Indonesia, Thailand and Colombia are also meeting within this ten-day period, just as market liquidity is set to decline for seasonal reasons.
It’s a different story for stocks and bonds, at least in the United States. Wall Street’s so-called ‘fear index’ and the ‘MOVE’ index of implied government bond volatility are at their lowest in months. The latter is notable given the big moves government bonds have made since the US presidential election on November 5 and the potential policy changes that could accompany Trump’s return to the Oval Office in January.
LONG FULL
Wall Street analysts warn that the second Trump administration’s agenda could cause currency volatility to last beyond the holidays.
In their 2025 outlook, currency analysts at JP Morgan advise clients that ‘heightened’ US policy uncertainty makes a strategic short of posture ‘unsustainable’.
“2025 will not be a year for the faint of heart to be short shrift,” they wrote on November 28, citing newly elected President Trump’s tough stance on trade and his threats to impose massive tariffs on some of America’s most important trading partners.
Karen Reichgott Fishman of Goldman Sachs echoed these statements last week, noting: “This makes it a good time to assess the value of hedging any exchange rate risks in global portfolios.”
But before Trump is sworn in, currency traders will have to navigate the looming tsunami of interest rate decisions this month. Put a bumpy end of the year on your calendar.
December 10
Reserve Bank of Australia: Markets estimate a 90% probability that cash rates will be held at 4.35%, with an easing of around 70 basis points expected by the end of next year. The RBA has not yet started its easing cycle.
December 11
Bank of Canada: Markets are pricing in a quarter-point cut and a 75% probability of a half-point move, with a cut of about 115 basis points over the next year. The BOC has already cut its bank rate by 125 basis points this cycle, the highest of any G10 central bank.
December 12
European Central Bank: Markets are pricing in a quarter-point cut, with an easing of around 150 basis points expected over the next 12 months.
Swiss National Bank: Markets are pricing in a quarter-point rate cut and a 65% chance of a half-point cut. Traders expect an easing of around 85 basis points over the next twelve months. SNB Chairman Thomas Jordan recently floated the idea that the SNB could return to negative interest rates if necessary.
December 18
Federal Reserve: Markets are pricing in a 90% probability of a quarter-point cut, with about 80 basis points of easing expected by the end of next year.
December 19
Bank of Japan: Traders expect the key policy rate to be raised by 10 basis points, with a tightening of around 45 basis points expected over the next 12 months.
Norges Bank: Markets are pricing in a 20% chance of a quarter-point cut, while an easing of around 120 basis points is expected in the coming year.
Riksbank: Markets are pricing in a 70% probability of a quarter-point cut, with around 100 basis points of rate cuts expected by the end of next year.
Bank of England: No interest rate change is expected at this meeting, but markets are expecting an easing of around 75 basis points over the next twelve months.
(The views expressed here are those of the author, a columnist for Reuters.)
