January 02, 2012
Managing of debt will remain the global priority. Growth, job creation, inflation, higher food prices, higher oil, higher energy etc are all secondary issues. This means that the world may be heading for another difficult year. It is evident from constant downside revision of global economy suggesting that recession will continue to be the dominating factor. It will not be surprising to see many economies heading into negative growth area. Europe will remain a key talking point in the first half of 2012, as European market is expected to remain fragile and risk of contagion is high.
Global focus in the 1st 2 quarters of 2012 would be on Europe as it could be a difficult beginning since banks will have to meet the capital adequacy requirement, which poses difficulty to lend in the corporate sector meaning tighter credit condition.
Majority of the countries in the Euro zone region is facing fiscal tightening and will have to curtail spending to bring down the surging deficit number unacceptable to the policy makers. Higher funding cost is another factor that would hinder growth in the region.
But Europe could face a bigger problem of balance of payment as many countries are required to feed their import bill. The problem is that USA has stopped lending to European banks. There are reports of flight of capital from European countries, which is also bad news for the region.
Overall, outlook for 2012 looks very difficult because despite numerous announcements, meetings and commitments, the outcome is not convincing or very impressive, which creates doubt in mind, though European Central Bank injected roughly Euro 500 billion in December 2011, but market is unsure about the next direction because banks did not give loans to business to boost economy. Neither had they offered funds to banks that offered profitable return due to mistrust. Some of the estimates suggest that in 2012, Europe requires USD two-trillion to meet the funding demand. The credibility factor of EU remains unresolved issue. Therefore, Euro zone break-up is still a huge possibility.
The other influencing factor that could impact Euro zone economies in 2012 is the rating cut, which may be a common news flash during the year. Europe cannot escape from further rate cut and quantitative easing and elections in Europe will provide more clues about the mood of people.
However, I expect Euro zone to remain intact. Despite opposition Euro will go for more quantitative easing, which is the only option available. Monetary union will not break up, but we will surely see some countries partying away. There is a huge risk that any unfavorable event could lead to protectionism and hence European currency will come under severe pressure.
Unlike Europe, sentiment for the US economy is in mildly bullish mode for the short term period. Recent US economic data have further helped in setting the tone. USA is already done with the big event of downgrading. US banks have tightened its noose on European bank and are refraining from lending, which gives further strength to its banking system. But despite cold shoulder shown by the Chinese, investment in US Treasuries remains very attractive, which performed better than corporate bonds and was the best performing asset class of 2011, which means demand for US treasuries this year would remain high.
The other positive for US economy and US Dollar in comparison with Europe is that USA is expected to grow slightly above 2 pct versus zero pct growth expected in Europe. So if USA is performing well, US investors will invest in USA, which is good enough for stimulation for US economy.
I think to avoid interruption US will continue with its monetary easing policy to keep up the pace of growth and USA will go for 3rd monetary easing to boost its housing sector, which could improve the job market condition.
However, we should keep focusing on European sovereign debt problem that could have contagion effect, as it may easily spillover into US economy as well. Europe’s goods and services to USA accounts for over USD 400 billion. US Bank’s exposure to German and French banks is roughly USD 1.2 trillion and to PIIGS country is around USD 640 billion. So worsening of European problem could easily drag USA as well.
EURO @ 1.2950 will remain under severe pressure during 1st quarter. Technically the currency will find 1st support around 1.2238 areas with crucial support at 1.1866. I will not surprised to see a bounce from hear, but may find resistance around 1.25 zones and requires monthly close above this level, failing to penetrate beyond means another dip and break of 1.1866 for 1.0895 or possibly 1.0462.However, on the upside break above 1.3620 would suggest Euro could be heading for more gains and may test another important resistance level of 1.3980. Break here confirms more bullish move towards 1.4550.
I am bearish for Euro and looking for substantial fall. But Sarkozy election will play key role in currency moves, because if he wins he may not be willing give up Euro neither would German leader be willing support French leaders thought. Sarkozy’s exit could mean Germany’s domination which may provide support to Euro.
GBP @ 1.5510 despite tough economic condition and plenty of problems like high inflation, deficit and job losses piling up in UK as there is a growing risk of negative growth for the second consecutive negative growth, which means another recession in next quarter. BOE will go for another round of quantitative easing, but British economy is likely to do well in 2nd half.
Pound Sterling may occasionally enjoy against Euro in crosses, but the British currency’s level on break 1.5230 to watch is 1.4950, but requires a clear break for a test of 1.4373 or possibly Cable will be dragged down to 1.3550 due to European financial crisis because Europe is UK’s largest trade partner. However, on the upside break of 1.6355 could be threatening for a test of 1.7565.
JPY @ 76.90 I believe that Yen will continue to blossom despite economic difficulties, lowest return in bond yield and threat of BOJ intervention. I am looking for convincing break of 74.80 this year for a move to 73.85. Real test could come around 70 Yen per UD Dollar, only break would pave way for 68.50. However, suggest watching 79.90 a break would encourage for a test of 82.75 that could brighten chances of a test of 84.50
CHF @ 93.90 is the currency to watch, as investors will keenly follow this currency during Euro meltdown, if that happens. In crosses SNB may have to frequently step in, as market could retest EUR/CHF 1.20 levels. I am expecting a break of 0.9580 for 0.9943. A clean break and monthly close of this level would pave way for 1.0430. However, if 0.9020 breaks 0.8776 would be important level to watch, which could mean test of 0.80.
Managing of debt will remain the global priority. Growth, job creation, inflation, higher food prices, higher oil, higher energy etc are all secondary issues. This means that the world may be heading for another difficult year. It is evident from constant downside revision of global economy suggesting that recession will continue to be the dominating factor. It will not be surprising to see many economies heading into negative growth area. Europe will remain a key talking point in the first half of 2012, as European market is expected to remain fragile and risk of contagion is high.
Global focus in the 1st 2 quarters of 2012 would be on Europe as it could be a difficult beginning since banks will have to meet the capital adequacy requirement, which poses difficulty to lend in the corporate sector meaning tighter credit condition.
Majority of the countries in the Euro zone region is facing fiscal tightening and will have to curtail spending to bring down the surging deficit number unacceptable to the policy makers. Higher funding cost is another factor that would hinder growth in the region.
But Europe could face a bigger problem of balance of payment as many countries are required to feed their import bill. The problem is that USA has stopped lending to European banks. There are reports of flight of capital from European countries, which is also bad news for the region.
Overall, outlook for 2012 looks very difficult because despite numerous announcements, meetings and commitments, the outcome is not convincing or very impressive, which creates doubt in mind, though European Central Bank injected roughly Euro 500 billion in December 2011, but market is unsure about the next direction because banks did not give loans to business to boost economy. Neither had they offered funds to banks that offered profitable return due to mistrust. Some of the estimates suggest that in 2012, Europe requires USD two-trillion to meet the funding demand. The credibility factor of EU remains unresolved issue. Therefore, Euro zone break-up is still a huge possibility.
The other influencing factor that could impact Euro zone economies in 2012 is the rating cut, which may be a common news flash during the year. Europe cannot escape from further rate cut and quantitative easing and elections in Europe will provide more clues about the mood of people.
However, I expect Euro zone to remain intact. Despite opposition Euro will go for more quantitative easing, which is the only option available. Monetary union will not break up, but we will surely see some countries partying away. There is a huge risk that any unfavorable event could lead to protectionism and hence European currency will come under severe pressure.
Unlike Europe, sentiment for the US economy is in mildly bullish mode for the short term period. Recent US economic data have further helped in setting the tone. USA is already done with the big event of downgrading. US banks have tightened its noose on European bank and are refraining from lending, which gives further strength to its banking system. But despite cold shoulder shown by the Chinese, investment in US Treasuries remains very attractive, which performed better than corporate bonds and was the best performing asset class of 2011, which means demand for US treasuries this year would remain high.
The other positive for US economy and US Dollar in comparison with Europe is that USA is expected to grow slightly above 2 pct versus zero pct growth expected in Europe. So if USA is performing well, US investors will invest in USA, which is good enough for stimulation for US economy.
I think to avoid interruption US will continue with its monetary easing policy to keep up the pace of growth and USA will go for 3rd monetary easing to boost its housing sector, which could improve the job market condition.
However, we should keep focusing on European sovereign debt problem that could have contagion effect, as it may easily spillover into US economy as well. Europe’s goods and services to USA accounts for over USD 400 billion. US Bank’s exposure to German and French banks is roughly USD 1.2 trillion and to PIIGS country is around USD 640 billion. So worsening of European problem could easily drag USA as well.
EURO @ 1.2950 will remain under severe pressure during 1st quarter. Technically the currency will find 1st support around 1.2238 areas with crucial support at 1.1866. I will not surprised to see a bounce from hear, but may find resistance around 1.25 zones and requires monthly close above this level, failing to penetrate beyond means another dip and break of 1.1866 for 1.0895 or possibly 1.0462.However, on the upside break above 1.3620 would suggest Euro could be heading for more gains and may test another important resistance level of 1.3980. Break here confirms more bullish move towards 1.4550.
I am bearish for Euro and looking for substantial fall. But Sarkozy election will play key role in currency moves, because if he wins he may not be willing give up Euro neither would German leader be willing support French leaders thought. Sarkozy’s exit could mean Germany’s domination which may provide support to Euro.
GBP @ 1.5510 despite tough economic condition and plenty of problems like high inflation, deficit and job losses piling up in UK as there is a growing risk of negative growth for the second consecutive negative growth, which means another recession in next quarter. BOE will go for another round of quantitative easing, but British economy is likely to do well in 2nd half.
Pound Sterling may occasionally enjoy against Euro in crosses, but the British currency’s level on break 1.5230 to watch is 1.4950, but requires a clear break for a test of 1.4373 or possibly Cable will be dragged down to 1.3550 due to European financial crisis because Europe is UK’s largest trade partner. However, on the upside break of 1.6355 could be threatening for a test of 1.7565.
JPY @ 76.90 I believe that Yen will continue to blossom despite economic difficulties, lowest return in bond yield and threat of BOJ intervention. I am looking for convincing break of 74.80 this year for a move to 73.85. Real test could come around 70 Yen per UD Dollar, only break would pave way for 68.50. However, suggest watching 79.90 a break would encourage for a test of 82.75 that could brighten chances of a test of 84.50
CHF @ 93.90 is the currency to watch, as investors will keenly follow this currency during Euro meltdown, if that happens. In crosses SNB may have to frequently step in, as market could retest EUR/CHF 1.20 levels. I am expecting a break of 0.9580 for 0.9943. A clean break and monthly close of this level would pave way for 1.0430. However, if 0.9020 breaks 0.8776 would be important level to watch, which could mean test of 0.80.
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