The views expressed in this column are solely those of the author and do not
reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its
that 2012 is here, it is time to reflect on the past year’s many memorable
events. How would we have survived
without the drama of the Kardashians or the antics of Charlie Sheen? Does Donald Trump really have a chance to be
the next President of the United States?
more serious note, how could we forget the images of the earthquakes and
tsunamis in Japan, or Hurricane Irene slamming into the East Coast? The Middle East brought us the Arab Spring,
the death of Osama Bin Laden, and the overthrow of Libya’s Moammar
Gadhafi. Most U.S. combat troops are now
out of Iraq. And for the finale of the year,
North Korea’s Kim Jung Il died and it appears as if his youngest son, Kim Jon
Un will take over, backed by the military.
the financial markets have been gripped by struggling economies, high
unemployment, low interest rates and the unresolved European sovereign debt
issues. In the foreign exchange market,
2011 may have not been the most volatile year, but there was plenty of news and
speculation to keep us on our toes.
The question is what will 2012 bring? I am not
smart enough to speculate whether Kim Kardashian will find a new beau; however,
I will try to formulate some predictions in the world of foreign exchange. I
suspect the themes that were popular in 2011 will remain the same for
2012. I expect the dollar to remain
strong with some chance to appreciate more, given the lack of carry trade
incentive against all other currencies and the prospect that yield spreads will
only narrow. The Federal Reserve has
pledged to keep rates unchanged until at least the middle of 2013. Economists
surveyed by Bloomberg, predict the European Central Bank will likely need to reduce
interest rates next quarter, while the Bank of England, the Swiss National Bank
and the Bank of Japan will stay on hold through 2012. Tight interest rate
spreads and elevated financial volatility have historically led to safe-haven
flows into safe haven low-yield currencies, which since early 2007 has included
the U.S .dollar, the Swiss franc and the
first trading day of 2012, the EUR has remained below the 1.3000 threshold,
reaching a 15-month low against the USD.
The 2011 peak for the EUR was 1.49 in May. It appears the euro zone stresses remain very
much intact. Most sentiment indicators continue to look weak and some have
already reached recession levels. Many companies and consumers remain unsettled
by the sovereign debt crisis in the euro zone. The first negative data for 2012
was the January 2 euro purchasing manager index (PMI). It printed at below 50,
indicating manufacturing continued to shrink as 2011 came to an end.
and other sentiments continue to evolve in a way that is clearly proving
problematic for the EUR. The euro is
also vulnerable to the decline of business confidence surveys around the world,
which creates downside risks to the projected interest rates for the ECB over
the medium term. Of course, the 800
pound gorilla is how European leaders will struggle to find ways to curb the
region’s growing debt crisis, which has seen bailouts of Greece, Ireland, and
Portugal and now threatens to engulf Italy and Spain. Many believe any hope for
immediate solutions to this crisis is likely nonexistent.
is likely to continue to benefit in 2012 from interest rate convergence and
risk aversion. With most central banks likely to be in or close to a policy
easing mode, pressure on rate differentials to converge towards Japan-like
levels (near zero) is likely to persist. Faced with continued uncertainty in
the global financial markets and an unattractive array of developed economy
yields, Japan’s current account is likely to remain insufficient and there may
be persistent repatriation pressure of foreign investments. Foreign currency
intervention from the Bank of Japan remains an important limit on significant
JPY appreciation, particularly with Japan now running a trade deficit. Japanese exporters are sure to continue to
struggle with the yen trading below 80 per 1 USD. However, the Bank of Japan
will have a difficult time establishing a definitive floor in USD/JPY.
GBP-specific story is one of continued sluggish growth and negative real policy
rates. The sterling has been an indirect beneficiary of EUR strain, as
investors have stepped up their diversification into sterling during periods of
elevated EUR concerns. The shortage of AAA reserve currency alternatives to the
EUR implies that the GBP may continue to see some demand in the near term. However, more deterioration in the euro area
would likely stall any UK recovery and prompt further easing from the Bank of
Canadian economy is primed for further expansion in 2012 amid continued
domestic growth and a sluggish recovery in the U.S. Canada’s dollar may turn into a haven for
foreign-exchange investors shunning European turmoil and seeking the safety of
the U.S. without the budget deficits or political gridlock. As the U.S.
struggles with a $1.4+trillion budget shortfall, AAA-rated Canada may use
rising commodity revenue and spending cuts to balance the budget. Canada’s
economy is growing at 3 percent, twice the average pace of Group of Seven and
euro-area nations. Bank of Canada will likely be the only central bank in the
Group of 10 countries that may raise interest rates next year. Inflation has exceeded the bank’s 2 percent
target for the last 11 months as the economy grows.
outlook for a reduced risk environment and global interest rate convergence
argues that carry trade currencies may lose their luster. While domestic data
have stabilized somewhat over the past quarter and second half 2011, GDP is
likely to print strong, driven by mining investment. The lower inflation
outlook has allowed the Reserve Bank of Australia (RBA) to start cutting rates.
This is reducing AUD's yield spread advantage, and in a case of a more of a
more serious global downturn, the RBA has the scope, as in the past, to cut
rates more aggressively. In addition, the AUD is particularly vulnerable due to
its reliance on elevated commodity prices and steady global growth. The median estimate of economists from a Bloomberg
survey indicates China’s economy, the world’s second largest, may slow to 8.5 percent
next year, from 9.2 percent GDP growth percent in 2011. China accounts for 25
percent of Australia’s exports, with Asia taking more than 70 percent,
according to the Reserve Bank of Australia.
there is plenty of uncertainty in today's global economy. Hedging is one way to help reduce some of the
Good Luck and Happy New Year!
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.