forex trading outlook today - best currency buy winners and losers for 2012 ; Even for those of us that have been around the block a time or two, 2011 was one for the record books. In Europe, the debt crisis appears to have spread to the larger Eurozone economies, the stubbornly sluggish U.S. economy refuses to make a breakout and the devastating tsunami in Japan continues to take a toll on the Japanese economy. May we all see better times in the year ahead?
Sentiment aside, what is the likelihood that 2012 will offer an improvement on 2011? The fundamental concerns driving the markets today will not magically improve on January 1st – in fact, the outlook in some cases may actually be worse.
To attempt to form a view for the year ahead, this article looks at how several key factors could impact exchange rates for the major currencies. Wherever possible, comments from lawmakers and fiscal authorities are referenced with recent statistics; keep in mind that this article is for discussion purposes only and is not to be taken as advice.
Interest Rates
Interest rates have a significant impact on exchange rates as demand for a currency fluctuates in accordance with yields. When a central bank raises interest rates in response to economic conditions, demand for that currency often rises as investors naturally buy securities offering higher yields. When a central bank cuts interest rates, this typically leads to a decline in demand for a currency.
During 2011, there was little movement with respect to interest rates for the major currencies. Obviously, this was due to the fact that many central banks continue to pursue a policy that includes very low interest rates as part of their efforts to boost economic activity.
The Federal Reserve continues to state publically that it intends to leave the Federal Funds rate unchanged at 0.25 percent until mid-2013. At this time, there is little reason to expect an increase ahead of the Fed’s current timeline.
In addition, the Federal Reserve continues its implementation of “Operation Twist.” This program was introduced in the second half of 2011 and includes the sale of $400 billion in short-term securities to fund the purchase of longer-term bonds. The Fed expects this action to reduce the yields on long bonds, which it is hoped, will encourage investors to pull their money out of long-dated securities in favor of direct market investment.
EUR
The European Central Bank was one of the few central banks to engage in changing interest rate this year. The Bank hiked rates by 25 basis points in April and May to lift the benchmark rate to 1.50 percent. In November, the European Central Bank was forced to cut rates as the debt crisis worsened in the second half of the year.
On December 8th, the ECB surprised no one when it dropped rates by another quarter point. The Bank also implemented a series of actions to boost activity, the most significant of which consists of two, three-year refinancing operations for the region’s banking system.
This is essentially a form of quantitative easing that provides fixed-rate loans to ensure liquidity for the banks in an attempt to safeguard against the potential default of sovereign bonds. The ECB also reduced the reserve ratio from 2 percent to 1 percent.
GBP
Bank of England Governor Mervyn King recently decried the impact the European debt fiasco is having on the British economy. King also stated that without the combination of low interest rates and the millions of pounds in quantitative easing provided by the Central Bank, the economy would be at even greater risk.
Following the Bank’s final policy announcement for 2011, interest rates were left unchanged at 0.5 percent. The Bank also confirmed there would be no change in the asset repurchase program. The message is obvious – until the economy shows significant improvement, it will be a “steady-as-it-goes” approach heading into 2012.
JPY
More so than the other major economies, Japan depends on exports to drive its economy. As would be expected given the difficulties most of the Western economies have faced in the past few years, Japan’s exports have softened on weaker global demand.
Japan’s exporters must also contend with the relative strength of the yen against the U.S. dollar. Even though China recently supplanted the U.S. as Japan’s largest export market, Japan still sold over $120 billion to America in 2010. The more the yen appreciates against the dollar, the more expensive Japan’s products become for American consumers.
On October 31st, Japan’s Finance Minister instructed the Bank of Japan to sell an estimated 8 trillion yen ($102 billion) into the currency markets in an attempt to stem the yen’s appreciation. This action led to a decrease of nearly 5 percent in the value of the yen but the impact was short-lived and the yen soon made up the lost ground.
CAD
Halfway through 2011, it appeared that Bank of Canada Governor Mark Carney was prepping the markets for a rate hike. Carney spent considerable effort discussing the problems that cheap money was causing the economy, fretting particularly over the debt level of Canadian families.
However, with the uncertainty in Europe and new evidence that China is expanding at a slower rate, demand for Canadian exports is expected to decline. Even the International Monetary Fund has identified this as a risk to the Canadian economy prompting the IMF to lower its precious 2012 outlook from 2.6 percent growth to just 1.9 percent.
As a result of the downgraded outlook, the Bank of Canada voted on December 6th to leave interest rates unchanged at 1 percent. With next year’s growth projection now below the 2 percent growth target, the lower threat of inflation in 2012 further reduces the need for a rate hike.
AUD
Besides the European Central Bank, the Reserve Bank of Australia (RBA) is the other central bank in this list to adjust interest rate during 2011. In this case, the Reserve Bank of Australia slashed the lending rate by 25 basis points in November and again in December to reduce the lending rate to 4.25 percent.
For 2012, the Reserve Bank of Australia has identified the ongoing European debt crisis as a tangible risk to the Australian economy. Accordingly, the RBA has downgraded its growth outlook for next year and the futures market has already priced in a 50 basis point interest rate cut for the first quarter of 2012.
Source http://www.forexjournal.com
Sentiment aside, what is the likelihood that 2012 will offer an improvement on 2011? The fundamental concerns driving the markets today will not magically improve on January 1st – in fact, the outlook in some cases may actually be worse.
To attempt to form a view for the year ahead, this article looks at how several key factors could impact exchange rates for the major currencies. Wherever possible, comments from lawmakers and fiscal authorities are referenced with recent statistics; keep in mind that this article is for discussion purposes only and is not to be taken as advice.
Interest Rates
Interest rates have a significant impact on exchange rates as demand for a currency fluctuates in accordance with yields. When a central bank raises interest rates in response to economic conditions, demand for that currency often rises as investors naturally buy securities offering higher yields. When a central bank cuts interest rates, this typically leads to a decline in demand for a currency.
During 2011, there was little movement with respect to interest rates for the major currencies. Obviously, this was due to the fact that many central banks continue to pursue a policy that includes very low interest rates as part of their efforts to boost economic activity.
The Federal Reserve continues to state publically that it intends to leave the Federal Funds rate unchanged at 0.25 percent until mid-2013. At this time, there is little reason to expect an increase ahead of the Fed’s current timeline.
In addition, the Federal Reserve continues its implementation of “Operation Twist.” This program was introduced in the second half of 2011 and includes the sale of $400 billion in short-term securities to fund the purchase of longer-term bonds. The Fed expects this action to reduce the yields on long bonds, which it is hoped, will encourage investors to pull their money out of long-dated securities in favor of direct market investment.
EUR
The European Central Bank was one of the few central banks to engage in changing interest rate this year. The Bank hiked rates by 25 basis points in April and May to lift the benchmark rate to 1.50 percent. In November, the European Central Bank was forced to cut rates as the debt crisis worsened in the second half of the year.
On December 8th, the ECB surprised no one when it dropped rates by another quarter point. The Bank also implemented a series of actions to boost activity, the most significant of which consists of two, three-year refinancing operations for the region’s banking system.
This is essentially a form of quantitative easing that provides fixed-rate loans to ensure liquidity for the banks in an attempt to safeguard against the potential default of sovereign bonds. The ECB also reduced the reserve ratio from 2 percent to 1 percent.
GBP
Bank of England Governor Mervyn King recently decried the impact the European debt fiasco is having on the British economy. King also stated that without the combination of low interest rates and the millions of pounds in quantitative easing provided by the Central Bank, the economy would be at even greater risk.
Following the Bank’s final policy announcement for 2011, interest rates were left unchanged at 0.5 percent. The Bank also confirmed there would be no change in the asset repurchase program. The message is obvious – until the economy shows significant improvement, it will be a “steady-as-it-goes” approach heading into 2012.
JPY
More so than the other major economies, Japan depends on exports to drive its economy. As would be expected given the difficulties most of the Western economies have faced in the past few years, Japan’s exports have softened on weaker global demand.
Japan’s exporters must also contend with the relative strength of the yen against the U.S. dollar. Even though China recently supplanted the U.S. as Japan’s largest export market, Japan still sold over $120 billion to America in 2010. The more the yen appreciates against the dollar, the more expensive Japan’s products become for American consumers.
On October 31st, Japan’s Finance Minister instructed the Bank of Japan to sell an estimated 8 trillion yen ($102 billion) into the currency markets in an attempt to stem the yen’s appreciation. This action led to a decrease of nearly 5 percent in the value of the yen but the impact was short-lived and the yen soon made up the lost ground.
CAD
Halfway through 2011, it appeared that Bank of Canada Governor Mark Carney was prepping the markets for a rate hike. Carney spent considerable effort discussing the problems that cheap money was causing the economy, fretting particularly over the debt level of Canadian families.
However, with the uncertainty in Europe and new evidence that China is expanding at a slower rate, demand for Canadian exports is expected to decline. Even the International Monetary Fund has identified this as a risk to the Canadian economy prompting the IMF to lower its precious 2012 outlook from 2.6 percent growth to just 1.9 percent.
As a result of the downgraded outlook, the Bank of Canada voted on December 6th to leave interest rates unchanged at 1 percent. With next year’s growth projection now below the 2 percent growth target, the lower threat of inflation in 2012 further reduces the need for a rate hike.
AUD
Besides the European Central Bank, the Reserve Bank of Australia (RBA) is the other central bank in this list to adjust interest rate during 2011. In this case, the Reserve Bank of Australia slashed the lending rate by 25 basis points in November and again in December to reduce the lending rate to 4.25 percent.
For 2012, the Reserve Bank of Australia has identified the ongoing European debt crisis as a tangible risk to the Australian economy. Accordingly, the RBA has downgraded its growth outlook for next year and the futures market has already priced in a 50 basis point interest rate cut for the first quarter of 2012.
Source http://www.forexjournal.com
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