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Pound: comments and forecasts
According to Bloomberg Correlation-Weighted Indexes, this year British currency added 0.7% versus the developed nations’ currencies (US dollar increased by 1.1%, while euro lost 1.4%, the Index shows). Sterling added 2.3% against euro and ended the year almost unchanged versus the greenback.
Pound will be helped by the fact that the effects from the VAT increase are disappearing and, consequently, the inflation pressure might decrease. In addition, Olympic Games 2012 will encourage tourism and consumer spending.
Among sterling-negative factors one should name the consequences of the severe austerity measures, the slump of the world’s business activity and the negative effects of the European debt crisis on British economy.
The pace of wage growth in Britain falls behind the pace of the price growth. As a result, disposable income of British people is declining and causes contraction of retail sales provoking general economic weakness of the United Kingdom.
This year the pair EUR/GBP was steadily declining under the influence of debt problems in Europe. The European currency fell from the year maximums in the 0.9080 area to the levels in the 0.8300 area hit so far. For now pound’s appreciation doesn’t bother UK monetary authorities. Most likely, the Bank of England will think of taking some measures to curb sterling only if the pair drops to the 3-year minimum at 0.8000.
The pair GBP/USD has been trading in a more volatile way: during the past 6 months the British currency has reached the maximum at $ 1.66 and hit the minimum at $ 1.53. Pound is expected to stay above support at $ 1.52. If this level is broken, the pair may test $ 1.50. The rebound may take the pair to $ 1.6150.
Depending on what course the things will take in the first quarter of 2012, both Britain and the United States may get into another round of quantitative easing. The experts think that British central bank will increase its asset purchase program in February when the current stage of the purchases is finished. Until that moment the currency moves will be determined by the market forces.
Citigroup: emerging markets will rebound in 2012
2011 was an unhappy year for the emerging markets: MSCI emerging markets index slumped by 20%.
Analysts at Citigroup, however, believe that in 2012 the situation will be different and expect 25-30% rebound in emerging markets’ equity. In their view, negative factors which affected these markets – much sharper interest rate cycle and inflation cycle – will ease.
The specialists forecast soft landing in China: inflation will decline to the average level of 4.1%, so that Chinese monetary authorities will be able to conduct more loose monetary policy. The bank thinks that China will make as eight 50-basis point cuts in the reserve requirement ratio this year, with the first coming before Chinese New Year. According to Citigroup, the country’s growth rate will decrease to 7.5-8% in the first quarter before rebounding by the end of the year.
The outlook for the emerging markets will be influenced by the global economic environment, particularly Europe. Citi isn’t expecting a worst-case scenario in the euro area. The bank thinks that the emerging market currencies will stabilize against the greenback.
Byron Wien: forecasts for 2012
Byron Wien, vice chairman of Blackstone Advisory Partners, sees Europe’s future this way: Italy and Greece will default but stay in the European Union, because Europe “has much too much to lose if the European Union dissolves”. Wien says that European authorities will likely manage to come up with a long-lasting plan to solve its financial problems.
The specialist is optimistic about US economic prospects expecting the S&P 500 index to get above 1400. In his view, the unemployment rate will fall below 8%, while the economic growth will top 3%. If these predictions come true, Barack Obama will likely win president elections.
The economist claims that oil price will drop to $85 a barrel as the supply increases due to the extraction from shale and rock in the United States. Wien remains bullish on gold and says it will trade at $1,800 a troy ounce.
Note that last year 8 out of 10 Wein’s predictions were right, reports CNBC. Wein predicted the S&P would end the year at 1500 and the yield on the 10-year Treasuries would close out 2011 at 5%.
RBS: loonie will strengthen against yen
Analysts at Royal Bank of Scotland advise investors to buy Canadian dollar versus Japanese yen.
The specialists justify such recommendation but the fact that US economic outlook is getting better, while the prospects of Japanese economy seem rather dim.
It’s also necessary to note that the bank’s fair-value model, which takes into account the 5-year bond yield difference, oil prices and the S&P 500 Index, also indicates that Canadian currency has upward potential against yen. Japan’s current account surplus is moderating, weakening the outlook for yen.
According to RBC, loonie may rise to 79.5 yen in 3 months where it traded last time on October 31.
BBH on trading EUR/USD
Analysts at Brown Brothers Harriman are bearish on the single currency versus the greenback.
The specialists think that the pair EUR/USD will drop to $1.20 by the middle of 2012.
At the same time, the bank doesn’t recommend investors to sell euro at the current levels noting the large number of euro shorts: US economic outlook is gradually improving, so the demand for US dollar as the safe haven will decline.
According to BBH, it’s necessary to wait for euro’s rebound to $1.2900 and then start selling EUR/USD with a stop in the $1.3050 zone and targeting $1.2600 and $1.2000.
Merrill Lynch: sell EUR/CAD, AUD/CAD
Analysts at Bank of America Merrill Lynch note that oil prices have been range bound for 8 months. If they resume growth, that would be a very positive factor for Canadian dollar.
The bank thinks that oil prices may gain $20. Bank of America suggests selling EUR/CAD stopping at 1.3250 and targeting 1.2775 or even 1.24. The specialists note that the pair is trading within a very strong downtrend.
In addition, the analysts recommend going short on AUD/CAD as Aussie may be affected by the base metal prices.
JCER: Japan’s economy may have contracted in Q4
Economists at Japan Center for Economic Research (JCER) think that Japan’s GDP fell by 0.1% in the fourth quarter of 2011.
In their view, negative effects from the euro zone’s debt crisis which expressed in stronger yen and declining demand for Japanese product in Europe outweighed the support from reconstruction spending.
A third contraction in four quarters risks deepening public opposition to Prime Minister Yoshihiko Noda’s plan to double the nation’s 5% sales tax by 2015. This plan was approved today by the cabinet. The critics of the plan warn that a higher levy would undermine Japan’s fight against more than a decade of deflation.
According to JCER, Japanese economy will start gradually recovering in the first quarter of 2012 as more of the 20 trillion yen ($259 billion) in reconstruction money is deployed to the disaster-stricken northeast. The specialists note that the development of the situation in Europe will also have great impact on Japan’s economic outlook.
Japanese GDP figures will be released on February 13.
George Soros on euro zone’s future
Famous billionaire investor George Soros says that collapse of the single currency and break-up of the European Union would have catastrophic consequences for the global financial system.
Here are the comments of the economist cited by CNBC:
“Today, the euro is potentially endangering the political cohesion of the European Union”
“If the common currency were to break down, it will lead to the breakup of the European Union itself. And this will be catastrophic not only for Europe but also for the global financial system.”
“Unfortunately, they haven't yet solved the acute financial crisis and that is causing the situation to deteriorate...and (it) is not at all clear it will have a solution”.
Nomura: on the possibility of euro area’s breakup
Analysts at Nomura have lined up possible scenarios of euro’s collapse. At the same time, the specialists say that although the risk of breakup rose significantly in 2011, it’s not their central case. All in all, the specialists expect hard year for Europe.
Anyway, there may be following breakup scenarios:
1. The big bang breakup (full-blown breakup): the single currency ceases to exist.
2. Sequential breakup: the euro zone comes apart in drips and drabs. The analysts don’t think it's likely to happen as such process, during which weaker euro zone countries gradually exit will come to a halt when the process reaches one of the larger euro zone countries, such as Italy or Spain. At this point, the process would likely become uncontrollable and lead to a big bang collapse, including the core countries.
3. Consensual withdrawal: if member nations quits euro in a legally accepted way, possibly using a clause in the Lisbon Treaty.
4. Unilateral withdrawal: if a country exits the currency union without waiting for legal approval.
Societe Generale: forecast for GBP/USD
Analysts at Societe Generale claim that if British pound breaches support at $1.5360 (December minimum) trading versus the greenback, GBP/USD will weaken to $1.5270 (October 6 minimum) in 1-3 weeks and then slide to $1.5130 during the next 3 months.