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The Currency Outlook for 2012

A guest post written by DAR Wong

Currency Market Observations – 2 Jan 2012

Fundamental Outlook

The year of 2011 has been choppy in currency markets especially when it came to Eurozone. No one expects the sovereign debt crisis to be so viral and destructive that the whole Euro nations are now being put on watch scale by the rating companies for possible further downgrades.

According to statistic sources, 14 out of 27 Euro countries in European Union have debts higher than 60 percent of their Gross Domestic Product (GDP) ratio as of end 2010. Among all, Greece is rated the worst with 142.8 percent government debt relatively to GDP ratio, followed by Italy (119.0 percent), Belgium (96.8 percent) Ireland (96.2 percent), Portugal (93.0 percent), Germany (83.2 percent), France (81.7 percent), Hungary (80.2 percent) and the United Kingdom (80.0 percent).

In December, European Central Bank (ECB) awarded EUR489 billion (USD645 billion) in 3-year loan to Euro banks in effort to stamp out debt crisis. The lending amount exceeded the initially promised and spiked up the Euro currency. However, this could be almost the final combined efforts of policymakers and further doldrums of Euro sovereign debt might spell the “demise” of Euro economy in 2012.

Japan has been crippled after March 2011 following the earthquake and tsunami disaster in Sendai. As the U.S. government aims to keep low greenback value by increasing money supply for stimulus, the flight of global investors’ funds have been gushing into Asia since mid 2009 that triggered inflation in all Asian currencies. Japan is the most developed economy in Asia and yen has been perceived as safe haven when the American economy falters.

Despite yen has been rising gradually since 2008 during the U.S. subprime funds began collapsing, the March earthquake has added deterioration with the high valued yen affecting national exports and local expansion of large manufacturers reflected in the quarterly Tankan report. Japan’s GDP in Q3 2011 grew lesser than initial estimate while exports in November fell 4.5 percent. Latest unemployment for October month increased to 4.5 percent from prior 4.1 percent, showing deteriorating conditions in post-earthquake recovery.

The U.K. economy has been contracting for past 1 year since British government implemented austerity measures to cut jobs by 350,000 before year 2015. In December, this figure was further expanded to 710,000 by year 2017 and coupled with target GBP45 billion tax hikes over next 5 years.

Currently, Britain is standing at its highest 8.3 percent unemployment rate at 17-year record with 2.64 million people out of job as of October data. Housing demands remains murky and consumer spending drives the economy into contraction. Till now, Bank of England (BOE) has injected the package of GBP375 billion stimuli into bond-purchase program and wil end sometime in April. No sign of recovery is seen with the punch of low interest rates!

Technical Forecast

In overall, European debt crisis will be highly prone to trigger recession for coming 2012. Sovereign defaults may balloon while U.K. will probably have more hard time to manage stagnation.  The U.S. will strive to poise for stability though recovery could be vague amid deceiving economic figures.  The only solution for U.S. to exit its rut is to resolve the budget deficits but no concrete plan has been reached in Obama administration till now!

Thus, we expect toughness and roller-coaster journey for euro and pound but more prone bias to weakness after Q1. On the other hand, dollar will trade in wild whipsaw patterns in 2012 especially when it is taken as an opposite hedge against euro and Japanese yen.

In Asia, yen has reached post-war high against the dollar. The dilemma of extending further gains in case Euro debt worsens will counter the technical trend of yen’s intervention. We predict the market will trade from 70.00 – 100.00 range in 2012 if coupled with few more currency intervention by the Japan’s government.

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

Wong is the founder and Principal Consultant of and holds a professional
qualification in NASD series 3 and 5 approved by National Futures Association (USA).


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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

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