2012 began with light trading activity in the Forex market and a slight strengthening of the U.S. Dollar as a result of a diminished appetite for risk assets. The European debt crisis took center stage once again and shaped market sentiment. Analysts still believe the U.S. currency will benefit from all the positive data reports released recently and will continue to rally. The credit crunch in other parts of the world could act as a major catalyst for the appreciation of the greenback. Traders will examine this week’s economic releases closely, especially the Non-Farm Payroll report due out on Friday.
Meanwhile, the Euro continued on its downward trend against the U.S. monetary unit after a release confirmed that E.U. Manufacturing PMI printed at – 46.9. Though economists anticipated these figures, it confirmed that manufacturing contracted for the fifth consecutive month. The shared currency also declined to an 11-month low versus the Yen prior to paring declines as investors continued to worry that the debt crisis will curtail growth. The Euro pared prior losses following an announcement by the European Central Bank indicating that the overnight deposits by the region’s financial institutions dropped after having reached record highs one week ago. Furthermore, the German government refused to comment on speculation that it may ask creditors to take bigger losses on Greek debt than what was previously agreed on. The Pound Sterling also declined during light trading after Prime Minister David Cameron made a pledge to take a more active role addressing “excess in pay” in the financial sector. Cameron stated that he believes the country will manage to survive what’s expected to be a tough year. The Sterling was also weighed on by a speech delivered by German Chancellor, Angela Merkel, during which she stated that 2012 will be more challenging ad difficult than 2011.
The Yen sustained gains during the final days of December last year as appetite for safe havens surged in the markets. Some analysts believe the Japanese currency advanced as exporters repatriated the Yen, while others believe it was due to the fact that Japan doesn’t want to antagonize the U.S. after American criticism of the three recent Yen interventions. Lastly, the Australian Dollar rose against the greenback.
EUR/USD- Euro’s 10 Year Anniversary
The Euro traded lower on its 10th anniversary and will likely be weighed down by the region’s debt crisis in the months to come. According to analysts, investors are expecting this to be the year E.U. leaders work towards achieving fiscal integration; they also expect many member nations to leave the Euro zone. The shared currency dipped as economic data revealed that Manufacturing PMI contracted, although it was slightly higher than forecast for Italy and Germany. Other news that grabbed investor attention included a report by Greece’s Central Bank Governor Provopoulos who warned against re-implementing the Drachma, suggesting that the standard of living would plummet. And although trading was very light due to the holidays, in an effort to avert any negative perception, Spain announced further tax increases and new austerity measures to counteract its 8 percent budget deficit.
GBP/USD- Cameron Vows To Take More Action
In a message to the nation, Prime Minister David Cameron mentioned that the U.K. would receive plenty of international attention this year as the Queen celebrates 60 years on the throne and the Olympic Games will be held in London. He stated that he would take strong action to solve the economic problems affecting British society and he pledged to address the “excess pay” in the financial sector. And although China announced a small increase in Manufacturing PMI, risk appetite rose temporarily, but was tempered by further concerns over the Euro region’s debt crisis. According to analysts, the U.K. faces trouble times of its own with speculations of another bout of quantitative easing and the likelihood of the country falling into a double-digit recession. However, if the U.K. manages to keep its AAA credit rating, and the currency remains the “relative refuge” for traders who wish to stay away from Euro turmoil, the Sterling may rebound.
USD/JPY- Light Activity Hurts Yen
The Yen rallied towards the last few days of 2011. Thin trading at the start of 2012 hurt the JPY as the pre-holiday liquidations pushed it down. It soon rebounded, and many believe it’s due to the repatriation of Yen by exporters. It’s possible that traders begun to buy more Yen as they’re certain an intervention is unlikely at this time. Economists believed the recent economic releases would affect the value of the Yen; however, it seems that the opposite has taken place and this is probably due to the turmoil in the Euro region which is boosting demand for safety.
USD/CHF- Swiss Franc Poised To Increase
Despite efforts to place caps on the value of the Franc, the currency is expected to increase as traders seek refuge from the Euro-zone’s debt crisis. The Swiss Franc resumed its hawkish trend versus the U.S. Dollar as 2011 came to a close.
Today’s economic calendar shows that Japan’s market is closed in observance of a Bank Holiday. The E.U. will report on Germany’s Unemployment Rate. The U.K. will announce Manufacturing PMI. The U.S. will release data on ISM Manufacturing Index and will publish the Minutes from the last FOMC Meeting. Lastly, Switzerland will announce the SVME PMI.