Monday, January 3, 2011

easy-forex 2011 forex forecast

As we roll into the new year we expect a continuation of positive fundamental data from the US, indicating a stable and sustainable US economic recovery. We believe the US dollar will strengthen tremendously on safe haven demand as the eurozone battles with sovereign default risks, aggressive austerity measures and uncertain European solidarity. Risk aversion spurred by eurozone problems will feed into the price of gold, the US dollar (USD) and the Swiss franc (CHF).

We estimate that gold will trade by the end of Q2 in a range of $1550 – $1650 as global risk aversion remains elevated and the dollar/yen (USD/JPY) will trade around a 93 – 97 range. Although the Japanese yen is traditionally expected to strengthen during global risk aversion we expect the Bank of Japan to openly intervene at the 80 levels and that the size of the Japanese deficit will cast a shadow on the yen’s safe haven status.

Our Euro/dollar (EUR/USD) expectation by the end of Q2 is to trade between 1.20 – 1.25. The Swiss franc strength will mostly be expressed through short EUR/CHF trades and we expect the pair to trade to new all-time lows between 1.23 – 1.28.

Q3, Q4

As we move into Q3 and Q4 of 2011 we believe that China’s economy will overheat and result in aggressive interest and reserve ratio tightening cycles. This will eventually lead to a Chinese revaluation of the yuan, which should improve China’s relationship with the US, help rebalance global trade and combat local Chinese inflation.

We believe that Japan will benefit if China revalues as global rebalancing will allow Japanese exports to become more competitive. Higher Japanese corporate profit margins and large unsustainable budget deficits will result in Japanese corporations looking for higher returns in US higher-yielding assets. The US dollar is also likely to strengthen on the back of Chinese yuan revaluation as the global rebalancing trends start to materialise.

In the US we expect GDP growth to pick up at 3% and 4% for Q3 and Q4 respectively with inflation remaining at or below the 2% mark. We also expect a pickup in US employment. Q3 we believe will see the start of the debate for the Federal Reserve Bank to unwind its extraordinary monetary policy and by the end of Q4 we feel that the markets would have fully priced in a Fed exit strategy from its loose monetary policy. This will add further strength to the greenback.

In Europe we believe the focus on the sovereign debt markets will intensify. The fundamental structure of the European Union and the common currency will be questioned as European leaders are unlikely to act unilaterally. We believe that the eurozone will continue with its piecemeal approach to solving individual country issues. This will pressurise the euro as investors will continue to worry about potential defaults by member countries in the future. We feel that such an approach will heighten the risk of an EU breakup as leaders fail to meet eye to eye and economic policies diverge. Furthermore we expect that Greece, Spain and Portugal will not meet their deficit reduction targets. This may result in a vicious debt spiral for peripheral Europe where any savings made from austerity measures will be paid in higher interest rates demanded by the bond markets. Europe will be faced with high unemployment and weak economic growth which should persist well into the year end.

As a result, the euro will be the great loser against most major pairs. By the end of Q4 we expect the EUR/USD to trade near parity between 1.00 – 1.05, the EUR/CHF to trade between 1.05 – 1.10, the GBP/USD between 1.30 – 1.35 and the USD/JPY to trade between 105 – 110. Gold should make an attempt for the $1900 level and trade between $1800 and $1900 by year end.

Country perspective: United Kingdom

In the UK, we believe that the combination of a higher VAT rate on consumer goods, tighter fiscal policy on businesses and a eurozone slowdown will have a negative impact on consumer and business confidence into 2011. We believe that the Bank of England will have no other choice but to stimulate growth through more quantitative easing into Q3 and Q4.

Despite higher inflation, the labour market still remains under pressure. This will restrict the Central Bank’s monetary policy in terms of interest rates and justifying another round of gilt purchases. The combination of the above coupled with a strong US recovery will keep GBP/USD under pressure. In 2011 we estimate the GBP/USD pair to retest 2009 lows at 1.30 – 1.35.

Country perspective: Australia

The Australian economy was one of the few major economies that narrowly missed a recession during the financial crisis of 2008 and 2009. It was also one of the first countries to start creating jobs following the crisis and the first major economy to aggressively hike interest rates to 4.75% following the crisis so as to prevent price pressures.

Australia is a major commodities exporter and has benefited greatly from China’s double digit growth and demand for recourses. We expect Australia will continue to benefit from China’s huge appetite for commodities and drive growth to 3-4% in 2011. We believe that there is a large possibility of a Chinese yuan revaluation which we feel will slightly dampen the demand for Australian commodities. Australia is also embarking on a self prescribed fiscal consolidation plan over the next few years.

Given both these factors we feel that the current level of interest rates in Australia will remain on hold for 2011. We believe the Australian dollar/US dollar (AUD/USD) is actually trading at its high and will consolidate in a trading range between 1.01 – 0.91 into 2011.

Country perspective: South Africa

South Africa achieved real GDP growth of 3.3% in 2010 as it received a boost from strong commodity and precious metal demand, a successful FIFA World Cup and loose US and EU monetary policy investing in higher yielding currencies such as the South African rand (ZAR).

Despite strong growth, South Africa is still suffering from high unemployment and elevated household debt which will undoubtedly dampen domestic demand in the coming year. We expect June year-on-year 2011 growth to be 4.5% as inventory restocking picks up. We then see growth moderating by year end to 3.5% as inventories stabilise. We expect interest rates to be hiked no more than 75 basis points, attracting more foreign capital flows looking for attractive yields and supporting the rand. We also expect an increase in overall private investments both foreign and local while government spending will be constrained. Overall for the South African rand/US dollar pair (ZAR/USD) we foresee trading between 6.2 and 6.4 by June 2011 and 6.9 – 7.1 by year end. The euro/rand pair (EUR/ZAR) is expected to trade between 8.6 – 8.7 by June 2011 and between 8 – 8.2 by year-end.

Expected trading ranges for 2011

End of 2nd Quarter (2011)

End of 4th Quarter (2011)


1.2000 – 1.2500

1.0000 – 1.0500


93.00 – 97.00

100.00 – 105.00


1.2300 – 1.2800

1.0500 – 1.1000


$1550 – $1652

$1800 – $1902


1.0100 – 0.9100

1.0100 – 0.9100


6.2000 – 6.4000

6.9000 – 7.1000


8.6000 – 8.7000

8.0000 – 8.2000


1.4200 – 1.3700

1.3500 – 1.3000


10.0000 – 9.5000

8.5000 – 8.0000


6.4000 – 6.3500

6.10000 – 6.0500

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