FX Market Overview

Well it was a wet and windy return to work in the UK but having battled through floods, fallen trees and higher rail fares, it gives me the greatest of pleasure to wish you all a very Happy New Year. I hope your Christmas break was a good one with plenty of peace and goodwill in evidence.
As far as the markets go, 2011 ended with fears that the Eurozone would drag the global economy into recession and 2012 has started on the same note. EU politicians and central bankers are admirably upbeat or in blind denial dependent on your point of view but there remains the concern that they are still tinkering with the results of a debt crisis rather than making more substantive plans to tackle the cause. Many believe that by this time in 2013, at least three of the current Eurozone countries will have abandoned or been ejected from the single currency project and I can see that as a possibility when the plans being laid to tackle a debt crisis are centred around more debt of a slightly different hue and yet insufficient funds are being made available to provide the shock an awe that is probably necessary to allay market fears and bring down the cost of borrowing for EU member states.
So we start 2012 with that fear still festering in the background. Last week was most notable for the Italian bond auctions which saw Italy having to pat near 7% to borrow money. That makes the cost of servicing their debt unsustainable in most eyes. IF that carries on, it is a sure sign that the markets don’t have any faith in what the EU leaders are doing and it will mean Italy is going to face a leg-crossingly painful year. And yesterday’s data showed a fifth consecutive month of decline in European manufacturing; a pretty certain sign that Europe is back in recession.
The fear amongst market participants is manifesting itself in a stronger US Dollar, Sterling at a 10 week low against the USD and the Euro at an 11year low against the Japanese Yen. Further strength in the US Dollar is probable and, much to the chagrin of the Japanese authorities, further strength in the Yen is also highly likely. Sterling is stronger against the Euro but still struggling to break above €1.20. However, the UK’s close trading relations with Europe mean the Pound is weaker against almost all other currencies. We hear a lot about how Britain will suffer if the Eurozone collapses and whilst there would inevitably be some fallout and it could well be bad, I tend to think the problems are over hyped by those with a vested interest in keeping the European gravy train on course but Sterling was always going to struggle while the Euro area contemplated its own belly button and failed to act decisively.
Oddly though, the Australian and New Zealand Dollars, which would normally be very weak in these circumstances, are remarkably strong. A very upbeat survey amongst China’s service sectors boosted confidence in the Asian and Australasian region and there is a feeling that America’s purchasing managers indices, due for releases this week, will be equally upbeat. Further strength in the Australasian Dollars is likely.
The rest of this week is dominated by business sentiment indices from various countries including the US, UK and the Eurozone. It includes this evening’s release of the minutes from the last meeting of the Federal Reserve’s Open Market Committee which will be very interesting to read. The week ends with the December edition of America’s employment report which is expected to be rather upbeat. In essence, we ended 2011 with volatility and we seem destined to start 2012 in similar vein. So welcome to the New Year and brace yourselves.