Wealth Builder FX Blog

The currency markets are getting alot of attention lately from investors with good cause as this is one sector that - if managed properly- can provide good levels of growth & profit for those who participate.

Those who fail to learn from the past are doomed to relive it.  One thing is certain... There's no way back to 2007 ! 

The world has come to the realization that the USA and European countries have been living beyond their means for many years. The crisis we are living with now is the culmination of bad governement policy and overspending together with the unwillingness from the private sector to increase spending or economic activity in the wake of subsequent reductions in government spend. Of course any first year undergraduate economics student could tell you that if you spend more than you earn...  sooner or later it will catch up with you. 

We are desperate for global growth to help us through and many believed that China might be the saviour to pull everyone though the tough times.  But as concerns deepen over the slowing growth rates in China  in the face of what seems like a never ending story of economic barrenness and uncertainty, the question is raised - Who will save the global economy?

 EuroZone

As the European crisis continues now into 2012 , the focus has been on Italy and its problems, because Italy has the ability to cause greater damage to the eurozone and its single currency than Greece ever had. However, the latest event in the Euro crisis is the credit ratings cuts of several countires on Friday 13th  by Standard & Poor.

The agency cut the credit ratings of Cyprus, Italy, Portugal and Spain by two notches and France, Austria, Malta, Slovakia and Slovenia by one notch.

But the significant cut was to the rating of France, which dropped from AAA to AA+, leaving Germany as the only major economy in the eurozone with a AAA credit rating. Italy went from A to BBB+, Spain from AA- to A, Austria from AAA to AA+, Portugal BBB- to BB, Malta from A to A-, Cyprus from BBB to BB+, Slovakia from A+ to A and Slovenia from AA- to A+.

S&P said it was "primarily driven by insufficient policy measures by EU leaders to address systemic stresses".

France still has a top AAA rating from the other two main agencies, Moody's and Fitch.

It's likely that the Eurozone may not exist in its current form by the end of 2012. There could be a scenario that would see the stronger countries like Germany & France being part of a smaller version. Some kind of fiscal and even political union would be one way of solving somes of the issues.  So could we see a United States of Europe perhaps?, with member countries becoming more like states ??  I hope I'm wrong. It would be nice to see the Euro and it's Zone survive. 

The uncertainty over this is likely to mean more weakness and volatility for the Euro dollar in 2012. We've already seen some  volaitility in the EUR/USD and GBP/USD pairs so far this month.

CHINA

China is starting to make its move with the internationalisation of the renmimbi - and that process is happening faster than most expected. We could expect to see the ability to trade the yuan renmimbi on the international stage outside of Hong Kong perhaps as soon as later this year.  While its a long way from the potential to replace the greenback as the worlds reserve currency, the writing is starting to appear on the proverbial wall.  Although alot of things would need to happen in China for this to become reality. Some kind of move closer to a democracy would have to be part of that I would have thought.

However, for now, The USD remains King and that's not likely to change anytime soon.

Austerity measures in both USA and Europe will mean slower growth or even recession, so more turmoil and economic challenges look to continue into 2012 and beyond as it will take many years for these economies to recover from their debt levels.

Emerging Economies

In 2012 an important milestone will be reached when the developing economies will import more goods than the developed or so called rich economies. The GFC has hastened the shift in economic power towards the newcomers. Real GDP in the developed world is no higher now than it was in 2007. In constrast,  the output of the developing or emerging economies grew by some 25%.

In 2012 emerging economies will account for nearly 50% of global retail sales.  China looks likely to overtake the USA as the worlds biggest importer by 2014.

  Aussie Dollar

The big four banks in Australia (which are among the strongest banks gloabally) have recently been quoted that they expect to cut staff and overhead in the expectation of further funding cost increases from the continued Eurozone problems. Major Australian bank exposure to offshore funding markets means the Aussie will remain at the whim of investor risk apetite. The AUD gains on positive developments and then sells off aggressively on negative ones, as the HSBC strategy team recently put it.

Countires that have the flexibility to ease policy will do so this year, which will lead to lower interest rates in Australia. Caution is recommended for long term positions on commodity based currencies like the AUD, CAD and NZD because an improving US economy will cause investors to start pricing in an end to quantative easing.

Most strategists think that the AUD will slip lower against the Greenback during 2012.

As the Eurozone crisis continues and the USA finds its way politically and economically, we think that 2012 will be another year of  currency volatiltiy and economic uncertainty.  This will translate into good opportunites again on the spot FX markets.

So... brace yourselves, 2012 will be interesting..  but it's not going to be the end of the world !