Where are Gold and Silver Headed in 2012????

Gold and silver changed direction very sharply throughout 2011: despite the sharp gains of gold and silver prices up until September, precious metals prices changed direction during the last quarter of the year and plummeted in a very short period of time; from this drop precious metals didn't recover throughout the remainder of the year. Silver declined below its initial price level from the beginning of the year, while gold ended the year only 12% above its price level from January 3rd 2011. Can we learn from the developments in the bullion market during 2011 to predict what will be the direction of gold and silver prices in 2012? Let's examine up close the development of precious metals in 2011 and offer a broad prediction for gold and silver in 2012.

Gold and Silver in 2011

During the first few month of the year, silver sharply outperformed gold and by the end of April silver rose by nearly 56%, while gold by only 9% from the beginning of the year. Once the price of silver sharply rose, CME raised the margins on silver; this action had an immediate response in the market and by May 17th silver declined to 7% above the initial price level. The next rally came from May to the beginning of September for both gold and silver. This rally came when the uncertainty in the markets rose especially around the speculation around the stability of the U.S. economy. This included the debate around raising the debt ceiling. This rally came to a halt in September, not only because the CME intervened and raise margins on gold and silver, but also because the FOMC decided to purchase $400 billion worth long term securities in lieu of another Quantitative Easing Plan. Since many had anticipated the Fed to come up with another stimulus plan, once there was only a plan to purchase LT securities without expanding the monetary base, the decline of precious metal prices soon followed.

The chart below shows the development of gold and silver during 2011, in which gold and silver are normalized to 100 for January 3rd, 2011.

The next chart shows the development of the ratio of gold to silver (gold /silver) during 2011; the ratio had a downward trend during the first few months of the year as silver outperformed gold, but towards the next several months the ratio had an upward trend as silver underperformed gold.

Here are five factors that may have affected gold and silver to trade down in 2011:

1. The FOMC's decision not to add another stimulus plan (quantitative easing 3) during the second part of 2011;
2. CME's decisions to raise the margins on silver and gold;
3. The European Debt Crisis that affected gold price especially during the second part of the year, via the liquidity problem that many EU banks and traders faced;
4. The strengthening of the U.S dollar against other currencies (see below);
5. The shift in market sentiment from considering gold a safe haven to a risky asset;

On the other hand, I consider there were three factors that pushed up gold and silver prices mainly during the first three quarters of 2011:

1. The FOMC's decision to issue QE2 by the end of 2010; this action raised the monetary base and consequently positively affected gold and silver prices mainly during the first few months of the year;
2. The speculation around the instability of the U.S. economy;
3. The anticipation of the Fed issuing another stimulus plan (QE3).

Outlook for Gold and Silver in 2012

Let's also break this forecast into factors that could push up precious metals prices compared with factors that may pull bullion prices down.

Here are three reasons why I speculate gold and silver prices will remain high and even rise in 2012:

1. Quantitative Easing Plan #3: if the U.S. economy won't start to recover, there is the possibility (even if it’s a small one) that the Fed will issue another stimulus plan (QE3);
2. Low interest rates: as long as the U.S. will keep its inertest rates low, gold and silver are likely to remain high;
3. Slowdown in the U.S. economy: since the U.S is entering an election year, the economic issues are likely to take the back seat; if the U.S. economy will enter a double dip rescission, precious metals are likely to thrive.

Here are four reasons to trade down gold and silver in 2012:

1. Recovery of U.S. Economy: If the U.S. economy will show signs of slow recovery as in the last few months of 2011, this may curb the rally of bullion prices and lower the chances of the Fed issuing another stimulus plan (QE3);
2. The European Debt Crisis: if the EU will continue to struggle in dealing with the debt crisis, this may also adversely affect gold and silver;
3. CME Margins: as seen in 2011, CME is likely to keep a vigilant eye on the development in the bullion market; if there will be a sharp gain, be sure there is the possibility that CME will intervene and raise margins again.
4. USD: If the U.S. dollar will continue to strengthen against other currencies including CAD and AUD, this may also negatively affect gold and silver prices.

Considering the statements mentioned above, I speculate there is a good chance gold and silver will perform poorer in 2012 than in 2011. If there will be another stimulus plan or an event that will stir up the markets then there is a small chance that gold and silver will perform better in 2012 than in 2011.

Zeshan Muhammad Ali Awan

Euro Fundamentals Point To Further Weakness, Sterling Maintains Range

Euro: Record Deposits At E.C.B, Further Easing Ahead

The Euro maintained the narrow range from the previous week amid the drop in market participation, but the single currency remains poised to weaken further over the near-term as the fundamental outlook for the region deteriorates. Indeed, commercial banks in Europe parked a record EUR 411B with the European Central Bank overnight, and the ongoing turmoil in the financial system may prompt the Governing Council to ease monetary policy further as the economy faces an increased risk of a major economic downturn in 2012.

In response, German Finance Minister Wolfgang Schaeuble argued that it’s imperative for the EU to stem the risk for contagion, but it seems as though the governments operating under the monetary union are becoming increasingly reliant on monetary support as the EU struggles to restore investor confidence. According to Credit Suisse overnight index swaps, market participants are pricing a 25% chance for a 25bp rate cut at the next policy meeting on January 12, and we may see ECB President Mario Draghi continue to target the benchmark interest rate in 2012 as the Governing Council moves away from its nonstandard measures. In turn, expectations for lower borrowing costs should dampen the appeal of the single currency, and we expect the EUR/USD to resume the downward trend from the end of October as European policy makers struggle to calm market fears. As the EUR/USD fails to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we may see the exchange rate give back the rebound from January (1.2872), which could expose the 23.6% Fib around 1.2630-50.

British Pound: To Consolidate Further Amid Expectations For More Q.E

The British Pound pared the overnight advance to 1.5699 and the sterling may continue to lose ground during the North American trade as market sentiment deteriorates. As the European debt crisis drags on Britain, Bank of England Governor Mervyn King has certainly become increasingly cautious towards the region, and the central bank head is likely to take additional steps to shield the U.K. economy as it faces an increased risk of a double-dip recession. As the BoE keeps the benchmark interest rate at the record-low, we are likely to see the MPC expand its asset purchase program beyond the GBP 275B target, but we may see market participants treat the sterling as a safe haven in 2012 as the U.K. government remains ahead of the curve in addressing its budget deficit. As the GBP/USD continues to trade within the broad range carried over from the previous month, we should see the pound-dollar continue to consolidate over the remainder of the year, but the sterling may come under increased pressure should we see trader sentiment weaken further.

U.S. Dollar: Index Maintains Narrow Range, Risk Aversion Sets In

U.S. dollar price action was largely mixed on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) maintaining the narrow range from the previous week, but we should see the greenback regain its footing during the North American trade as the U.S. equity market opens lower. As risk appetite falters, the shift in market sentiment should prop up the reserve currency, and the greenback may appreciate ahead of the New Year as there appears to be a flight to safety. However, as we’re anticipating to see positive developments coming out of the world’s largest economy, a slew of better-than-expected data could spark a rebound in trader sentiment, and the greenback may struggle to hold its ground should we see a rise in risk-taking behavior. 

Prepared by Zeshan Muhammad Ali Awan 

Here is How to Trade Forex Majors like the Euro During Active Hours

Zeshan Muhammad Ali Awan (Director Technicals)

Our past research shows that traders could be well-served restricting their trading to less-active trading hours, as general trader profitability tends to improve when markets are less volatile. But what if you can’t trade when it’s quiet? For traders who feel the need to be in the market during the more volatile times, here is some advice about how to do it.

The chart above emphasizes that FXCM clients tend to do poorly in the 5 most popularly traded pairs during the North American daytime. If we compare these results with measures of volatility, we can see that this poor performance seems directly correlated to sharp price swings, as this time of day tends to be the most volatile. The chart below shows the average hourly moves in pips for the EUR/USD, the most popular currency pair to trade. You can see that traders’ best results coincide with the times of day that have lower volatility, such as the Asia trading session.

Our previous article showed that the highly popular Relative Strength Index trading strategy produced significantly better risk-adjusted returns if we limited it to trade exclusively during the least-volatile hours of the trading day, 2 PM to 6 AM Eastern Time (New York).

What Strategy Should I Use to Trade the US Daytime?

As mentioned before, we advise traders to trade during the lower-volatility times of day due to the risks that volatility present, and the better results we see in the range trading strategies that FXCM clients tend to use. Some traders may prefer to trade during the volatile US daytime, however. So, if you’re going to do that, make sure that you use the appropriate strategy at the appropriate time. Do not try to range trade. Instead, do the opposite: trade breakouts.

What is a Breakout?

A breakout is when a currency that has been trapped in a range or channel on the chart breaks through support or resistance, escaping the channel. When this happens, the movement in prices tends to be very powerful, and can create a trading opportunity.

Here is an example where the EUR/USD Daily chart had a channel for two months. You can see that when this channel broke, the move was swift and powerful.

How Do You Trade Breakouts?

Trading breakouts is almost the exact opposite of trading ranges. When price moves upwards through resistance, look to buy. When it moves downard through support, look to sell. In the above example, a range trader would have tried to sell at the top of the channel and would have likely lost money. A breakout trader would instead have looked to buy.

Sample Strategy: Channel Breakout

The Channel Breakout strategy is quite straightforward and has performed fairly well historically. the system draws a channel surrounding price action, with the top of the channel set at the highest high and the bottom set at the lowest low of the past twenty bars. In the chart below, you can see the top of the channel in light blue and the bottom of the channel in red. The green dotted line shows profitable trades made by the system, while the red dotted line shows losing trades made by the system.

We sell the currency pair if the price breaks below the channel bottom. If price quickly reverses, we will be taken out of the trade at a loss. Yet if price continues lower, we stand to see profits on the continued moves.

Thus we can conceptualize this this trade system might work especially well during times of high volatility, when channels tend to be broken. Let’s test by looking at how well it has done on the Euro/US Dollar in the past several years:

Channel Breakout Strategy on EURUSD Pair from 2001-2011, 60min Chart

The channel breakout system did reasonably well overall, and especially well during times of strong market volatility in late 2009. Yet it has also had long stretches of underperformance and noteworthy losing streaks. Since we know that breakout strategies tend to work better during times of higher volatility, how can we instruct our system to trade only during those times?

When Should I Look to Trade Breakouts?

Every day, we publish Volatility Percentile figures on the DailyFX Technical Analysis page for reference. The Volatility Percentile is derived from FX options prices. The higher the number, the more volatile options traders expect the currency pair to be. We can use these volatility percentages to judge when it is best to use particular strategies. When volatility percentages are high, we look to trade breakout strategies. When they are low, we look to avoid them.

When looking at the Channel Breakout strategy above, a quick optimization shows that the strategy improves noticeably when we apply filters. We simulate two cases below. In one case, the strategy is only allowed to trade when our Volatility Percentile is above 50%. In the other, it is only allowed to trade when it is above 75%. As you can see in the chart below, in both cases we see better overall results than the “base case” of letting the system trade at any time.

With the 50 percentile filter, the strategy is allowed to trade about half the time. With the 75 percentile filter, the system can only trade about 25% of the time. Over time, the 50 percentile filter has been shown to prevent many of the losing trades in the system, while preventing only a few of the winning trades. This has produced the best historical returns on an overall final net-profit basis but has also shown significant losing streaks.

With the 75 percentile filter, prevents even more trades – both good ones and bad ones. While the overall result over the past six years has not been quite as good as the 50 percentile one, there were few times of significant losses. Indeed, when we fully take risk into consideration, we prefer the 75th percentile filter, as it makes rather fewer losing trades and we are glad to forego some potential profits in order to lower our risk of potential loss.

 

Has the Dollar Bottomed for a Decade or More? A Smacth Ahead.?

A scan of yearly and quarterly charts reveals reversal opportunities in the USDCHF (yearly and quarterly), AUDUSD (quarterly), NZDUSD (quarterly), and USDCAD (quarterly). I define a reversal with yearly data as a new 5 year high/low, a close above/below the prior year’s close, and a range for the year that is at least as large as the average range for the last 5 years. A reversal with quarterly data uses 12 periods (3 years) (for monthly 12, for weekly 13, and for daily 20). No method is immune to false signals, but key reversals indicate favorable reward/risk opportunities because a potentially significant pivot (high or low) is identified with minimal lag (when viewed in the context of the time frame being analyzed).

Many decade long turns have been indicated by yearly or even quarterly key reversals. A look at EURUSD yearly bars illustrate this point (arrows indicate yearly key reversals). The study also highlights the tendency for exchange rates to reverse during high volatility environments (hint – USDJPY volatility is NOT high which decreases the probability that an important low is in place).

EURUSD YEARLY CANDLES (since 1982 + DEM rates)

Created by Zeshan

The most recent yearly and quarterly key reversals are for the USDCHF, AUDUSD, NZDUSD, and USDCAD.

USDCHF YEARLY CANDLES (since 1982)

Created by Zeshan

Bearish reversals occurred in 1985 and 1998. 1998 was a false signal. This is the first yearly bullish key reversal.

USDCHF QUARTERLY CANDLES (since 2000)

Created by Zeshan

A bearish key reversal occurred in the 4th quarter of 2000. The 3rd quarter reversal of 2011 was the first quarterly reversal (bullish or bearish) since 2000.

AUDUSD QUARTERLY CANDLES (since 2000)

Created by Sarah 

A bullish reversal occurred in the 2nd quarter of 2001. Bearish reversals occurred in the 4th quarter of 2007 and the 3rd quarter of 2008. The 2007 reversal didn’t pan out. Price fell another 1900 pips (to the low) after the 2008 reversal (close to close was 897 pips). The most recent reversal occurred during the 3rd quarter of 2011.

NZDUSD QUARTERLY CANDLES (since 2000)

Created by Zeshan

A bullish reversal occurred in the 4th quarter of 2000. Bearish reversals occurred in the 3rd quarter of 2007 and the 3rd quarter of 2011. The 2007 reversal didn’t pan out immediately as the actual high was not until the 1st quarter of 2008.

USDCAD QUARTERLY CANDLES (since 2000)

Created by Zeshan

Since 2000, there has never been a USDCAD bearish quarterly reversal but there have been 3 bullish reversals; Q1 2004, Q4 2007, and Q3 2011. The 2004 reversal gave way to gains in the next quarter but eventually failed. The 2007 reversal resulted in a run from 1 to 1.30 within one year.

Summary

The most recent large degree reversals paint a picture of USD strength in 2012. Unless your holding period is a year or more (Ilya), I do not suggest treating these reversals as signals. Rather, understand that conditions for the pairs examined are consistent with previous long term reversals. This knowledge should help in constructing favorable reward/risk opportunities in 2012.

DailyFX Top Trade Opportunities of 2012

Zeshan Muhammad Ali Awan 
(Director Technicals Me & Ze Capital management)

Long USDJPY: Safety, Manipulation and Yield

My call for a drive higher from USDJPY has, admittedly, been a consistent belief of mine for much of this past year. And yet, the pair has forged little progress to make that a reality. As they say, patience is a virtue. My trading approach is to combine rudimentary technicals and capital flow-based fundamentals; and both of these legs of analysis lead me to the same bullish conclusion for the foreseeable future: an advance for USDJPY. The first consideration is the pair incredible proximity to its record low. Extending historical extremes is exceptionally difficult. So, we need a catalyst for reversal. Short-term, we have the threat of manipulation from the BoJ and Ministry of Finance to offer economic relief. Medium-term, we have the possibility of a deepening financial rut that makes us more selective of safe havens (the dollar is undisputed for relative liquidity, credit market stability). And, long-term, the return of higher global rates supports the Fed moving while the BoJ continues a two-decade, near-ZIRP policy regime. The question of timing the entry is my biggest hang up; but starting small and building up with confirmation is a good strategy for me.

Long CADJPY: The Return of the Carry Trade

It’s inevitable that all we can think of heading into the New Year is the threat of the global financial crisis and another world-wide recession because uncertainty is immediate and there is still considerable long-risk exposure out there that needs to be unwound. However, if we look beyond the next shock, we will likely find that a lot of the leverage will have been worked down and idle capital will need to be reinvested. There will be a significant level of high-speculative investments; but the bulk of funds will be put behind lower risk investments – namely carry trade. Rates and rate differentials are already low; and they will be lower by the time underlying conditions turn around. A pair like AUDJPY will immediately have an advantage as its yield spread will likely be higher at the turn; but a lot of the capital appreciation that occurs in the exchange rate lies with the rate hikes (and expectations of those hikes). That puts CADJPY is a very good position as the Canadian dollar’s rate is already low. What’s more, there is an investment quality to the ‘loonie’ due to its commodity infrastructure and guaranteed export demand to China and the US.

Sarah Abbas Gondal 
(Managing Director Me & Ze Capital management)

Long USDJPY

I would hate to think that the DailyFX analyst boat is getting pretty crowded with calls for a major reversal in the USDJPY. Yet I think there are many reasons why we might expect a significant USDJPY bounce, and the change in year is not the least of reasons the USDJPY might switch direction.

Instead of going long blindly into 2012, however, I’d like to see how we start off.

The above shows nearly 40 years of data in the USDJPY and the propensity for the pair to make its highs and lows for the year in the months of January and December. If we expected price to be completely random, there would be equal instances in which the highs/lows for the year were set for each month. Yet there were 9 instances in which the pair made its low for the year in USDJPY—nearly 25% of all years.

How might we look to trade this? With a long-term swing trade. If we see that the USDJPY respects 2011 lows in January, we could set orders to buy a break of January highs and set a stop below January lows. The limits would be set as conditions dictate. Yet we would have seasonality on our side, and having a central bank intent on keeping the USDJPY above record lows doesn’t hurt either.

Samera Mistry 

(Director Business Development Me & Ze Capital Management)

Short AUDUSD and Short NZDUSD: Strong Evidence of Long Term Reversals

A scan of yearly and quarterly charts reveals reversal opportunities in the USDCHF (yearly and quarterly), AUDUSD (quarterly), NZDUSD (quarterly), and USDCAD (quarterly). I define a reversal with yearly data as a new 5 year high/low, a close above/below the prior year’s close, and a range for the year that is at least as large as the average range for the last 5 years. A reversal with quarterly data uses 12 periods (3 years) (for monthly 12, for weekly 13, and for daily 20). No method is immune to false signals, but key reversals indicate favorable reward/risk opportunities because a potentially significant pivot (high or low) is identified with minimal lag (when viewed in the context of the time frame being analyzed).

Many decade long turns have been indicated by yearly or even quarterly key reversals. The study also highlights the tendency for exchange rates to reverse during high volatility environments (hint – USDJPY volatility is NOT high which decreases the probability that an important low is in place).

AUDUSD QUARTERLY CANDLES (since 2000)

A bullish reversal occurred in the 2nd quarter of 2001. Bearish reversals occurred in the 4th quarter of 2007 and the 3rd quarter of 2008. The 2007 reversal didn’t pan out. Price fell another 1900 pips (to the low) after the 2008 reversal (close to close was 897 pips). The most recent reversal occurred during the 3rd quarter of 2011.

NZDUSD QUARTERLY CANDLES (since 2000)

A bullish reversal occurred in the 4th quarter of 2000. Bearish reversals occurred in the 3rd quarter of 2007 and the 3rd quarter of 2011. The 2007 reversal didn’t pan out immediately as the actual high was not until the 1st quarter of 2008.

The most recent large degree reversals paint a picture of USD strength in 2012. Unless your holding period is a year or more (Ilya), I do not suggest treating these reversals as signals. Rather, understand that conditions for the pairs examined are consistent with previous long term reversals. This knowledge should help in constructing favorable reward/risk opportunities in 2012.

Mehak Awan 
(Director Sales and marketing Me & Ze Capital Management)

Short EURUSD: The Multi-Year Euro Downtrend Continues

Broadly speaking, the Euro has been trending lower since July 2008 having peaked above 1.60 against the US Dollar. More of the same seems almost certainly ahead. The Eurozone debt crisis remains unresolved, presenting a two-pronged problem. On one hand, it amplifies already considerable headwinds facing economic growth. Soaring borrowing costs amid fears of a default within the currency bloc stymie activity as individuals and businesses find it more expensive to spend and invest. In turn, slower growth reduces regional governments’ tax intake, making it harder to reduce deficits, stoking already considerable sovereign solvency fears and producing a vicious cycle. Economists’ consensus forecasts suggest growth in the Euro Zone will stall in 2012 and recovery only modestly in the following year. Meanwhile, growth in the US is expected to accelerate over the same period. This beckons aggressive monetary stimulus from the ECB, suggesting interest rate differentials will narrow firmly in favor of the US Dollar even if the Federal Reserve opts to make good on its promise to keep benchmark borrowing costs on hold through mid-2013.

On the other hand, it threatens to unleash another market-wide selloff and global credit crunch, plunging worldwide finance into another existential crisis just three years after the 2008 debacle. In the event of a default in a large country like Italy or Spain countless banks, funds and other institutions would be forced to book sharp losses. For some, taking such a hit will prove unbearable and they will be forced to go out of business, sending ripple effects across the markets as their creditors now face losses, and so forth. Those that remain standing will rush to raise new capital, with banks and funds dumping assets at fire-sale prices to meet reserve and margin requirements. This translates into another broad-based rout across asset classes, erasing incalculable amounts of firms’ and individuals’ wealth. It goes without saying that such an outcome would outright crush private-sector economic activity on a global scale. Needless to say, such an outcome bodes very well for safe-haven currencies and in particular for the US Dollar, where official intervention does not undermine its store-of-value properties (as is the case with the Japanese Yen and Swiss Franc, typically the other go-to safety vehicles in the FX space).

Zeshan Muhammad Ali Awan

Foreign Investment in US Equities

While on the surface, the recommendation appears to be non-currency specific, we view this as an extremely attractive opportunity for a portfolio hedge in 2012 and potential arbitrage strategy. Currencies have been broadly outperforming against the US Dollar in recent years and it finally appears as though this trend could be on the verge of some form of a reversal back in favor of the buck. However, long USD positions have also been quite risky and exposure to the Greenback might bring with it some unwelcome stress. As such, our recommendation for non-US residents is to instead, put their money into US equities. What does this mean?

Here is how we see this playing out. Should current correlations stand, if US equities are to head higher, then the investor will benefit from the US equity return, but at the same time, likely have his/her investment offset by the sell-off in the US Dollar and appreciation in his/her local currency on the resurgence in risk appetite and outflow from the safe-haven US Dollar. If on the other hand US equities head lower, then the risk off market environment will allow the investor to offset his/her loss in US stocks through the appreciation in the US Dollar on its safe-haven flows (remember – the investor in invested in US equities and thereby has USD exposure).

So if this is the case, then where is the benefit in this trade, and why even do it? Well, what if we see a break down in familiar correlations where the US equity market rallies and the US Dollar also rallies at the same time? What if we see a situation where US equities and the US Dollar become positively correlated? In this scenario, the investor stands to benefit a great deal and will not only make money from his investment in US equities, but will also enhance his/her returns on the appreciation in the US Dollar.

The global recession appears to be moving in phases, and with the markets now dealing with phase two of the crisis in Europe, we can start to anticipate the transition to phase three, where we believe that China, the commodity bloc economies and emerging markets will all be exposed. At the same time, we see a first in and first out type of situation, with the US economy the first to emerge from the global recession which should translate into a more upbeat outlook on low valuation US equities and the US Dollar as well, on a narrowing of yield differentials back in favor of the Greenback as the Fed begins to signal a reversal of ultra accommodative monetary policy.

Sarah Abbas Gondal

Short EURGBP: U.K. Remains Ahead Of the Curve

As European policy makers struggle to address the sovereign debt crisis, we expect the single currency to face additional headwinds in 2012. Although the EUR/USD will be the center of attention for most FX traders, I will be keeping a close eye on the EUR/GBP.

After actively trading the euro-pound throughout 2011, the British Pound has recent strengthened against its European counterpart, and the sterling should continue to outpace the single currency in the following year as the U.K. government remains ahead of the curve in balancing their public finances. As the euro-area faces an increased threat of a credit-rating downgrade, we expect the heightening risk for contagion to drag on the Euro, and the exchange rate should continue to push lower in the following year as the EU fails to restore investor confidence. However, as the fundamental outlook for the U.K. and Euro-Zone remains clouded with high uncertainty, monetary policy will be a key driver of price action for the EUR/GBP.

As the European Central Bank and the Bank of England carry their easing cycle into 2012, we expect to see additional monetary support in 2012, but the preemptive approach taken by the BoE should help to increase the appeal of the sterling. At the same time, with record-low rates in the U.K., we may see market participants move away from the Euro and into the British Pound should we see the flight to safety gather pace.

Sarah Abbas Gondal

Short AUDUSD: Risks to Global Growth, China

We have all witnessed the extreme volatility and resulting shocks to markets the crisis in Europe has ignited over the past year. Mainly, this is due to the debt contagion fears spread rapidly not only across the region, but also across the world’s most developed economies. Considering the magnitude of the EU crisis, it comes as no surprise that an ominous cloud has gone relatively unnoticed under the radar: China. As the Chinese government struggles to achieve a “soft landing” from the extraordinary measures taken at the height of the financial crisis, the economy continues to show signs of stress as growth in one of the world’s fastest growing economies begins to slow. China’s trade surplus has continued to shrink as a housing bubble appears to be ready to burst while current fears of a credit crunch have fueled concerns of a substantial slowdown in growth. As Australia’s top trade partner, a slowdown in China is likely to put pressure on the aussie as decreased demand for Australian exports weighs on the isle-nation’s economy.

In addition to the China story, the Reserve Bank of Australia is also likely to aggressively cut rates in 2012 with Credit Suisse overnight swaps now factoring in more than 116 basis points in interest rate cuts for the next twelve months, the highest expectations for cuts among the developed economies. In spite of two rate cuts towards the tail end of 2011, increased concerns over the debt crisis in Europe and expectations for further weakness in global trade will continue to put pressure on RBA Governor Glenn Stevens to soften monetary policy and maintain an accommodative environment for businesses.

AUDUSD Daily

The AUD/USD has been in consolidation since the June 27th high at 1.1079, with the pair continuing to hold within the confines of a wedge formation for the past 5 months. A Fibonacci extension taken from the June and October highs reveal clear resistance at the 23.6% extension at 1.0350 followed by the upper bound trendline of the wedge formation. Our bias will remain intact so long as this level is not compromised, with a breach above eyeing targets at 1.0750, and the 1.01-figure. Support targets are held at the 50% extension at the 99-handle, with a break here exposing targets at trendline support dating back to the October 4th lows and the 61.8% extension at the 0.97-handle. This level will remain paramount for the aussie with a break below risking substantial losses for the high yielder as it looks to test the 2011 lows at the 0.94-figure.

Samera Mistry

Swiss Franc to Underperform in 2012

Long EURCHF and USDCHF: What’s going on Across the Pond besides the Debt Crisis?

While the Euro-zone faces a recession even if it is able to climb the wall of worry and convince market participants that none of its member countries will default on their debt, other European nations are facing stress. The one of greatest interest, in my opinion, is Switzerland.

To put the Swiss economy in perspective, one needs to look no further than how the Swiss Franc performed from the start of 2011 until early August. The EUR/CHF opened the year at 1.2500, and as the United States’ debt deadline approached, coupled with the Euro-zone debt crisis, the EUR/CHF quickly approached parity. Recent data showed that Swiss growth in the third quarter had stumbled to a meager 0.2 percent rate on a quarterly basis, or 1.5 percent year-over-year. By September, Inflation was at a paltry 0.2 percent yearly rate, well-below the Swiss National Bank threshold.

The combination of these downside pressures on the Swiss economy – slowing growth, slower inflation, capital flight to the Swiss Franc which damaged the export sector – forced the SNB to place a 1.2000 floor in the EUR/CHF on September 6. Recent speculation suggests that the floor might be raised to 1.2500 or 1.3000 in the coming weeks now that the SNB can’t legally implement negative interest rates to deter Franc appeal. The SNB will be forced to act, regardless of what is transpiring in the Euro-zone.

Given the fundamental backdrop of Switzerland, it appears that the Franc will lose value over the course of 2012. In regards to the debt crisis itself, the European Central Bank may ultimately be forced to print money to help the periphery nations. This has implications for the Franc.

If the ECB chooses not to explicitly print money, the sovereign debt crisis is likely to get worse before it gets better, and investors will lose confidence in the future of the Euro-zone, and thus the Euro, fleeing to the Franc. This downside pressure on the EUR/CHF will force the SNB’s hand. Conversely, if the ECB does print money, the Euro will likely lose value, much like what the U.S. Dollar did after the Federal Reserve decided to inject the financial system with more U.S. Dollars; this too will put pressure on EUR/CHF. Both outcomes point towards a weaker Euro, and thus a weaker EUR/CHF (the third scenario, in which joint Eurobonds are issued, is off the table for now as Germany continues to oppose such an idea).

The deterioration of the Euro-zone coupled with the likelihood of the ECB printing money at some point in the coming months suggests that there will be increased downside pressure on the EUR/CHF, and thus, on the SNB to hold the 1.2000 floor. To head off these pressures, the SNB might preemptively raise the EUR/CHF floor to 1.2500 or 1.3000 in the coming months. Major banks have suggested that the floor could rise as high as 1.4000.

Even in the most bullish of scenarios, the outlook for the Franc remains weak. If the Euro-zone avoids a recession or collapse, the Swiss economy is primed to be dragged into a recession of its own, and the SNB will act accordingly. As such, promising trades in 2012 look long EUR/CHF and USD/CHF.

Euro Collapse Isn’t on the Books for January but Heavy Selling Could Be

We have seen five attempts to develop a ‘comprehensive’ solution to the Euro-area’s fiscal and financial troubles since Greece first succumbed to its debt load in the second quarter of 2010; and each has failed to maintain sentiment in turn. The most recent effort between the European Union and ECB couldn’t event muster the sense of shock-and-awe of previous program, and the market responded by quickly undermining the effort and selling the euro. While there are still options available to policymakers to fend off doomsday scenarios; there isn’t a palatable scenario for a strong euro performance through the immediate future. The status quo involves active but uncertain ECB purchases of government debt and general expectations for funding programs that haven’t really caught traction. The very real threat of an important downgrade to a AAA-rated EU country or the EFSF rescue program itself represents a looming peril that can fully undermine flimsy sentiment. Ultimately, the rules can always be changed to allow for a Greek default or some other pressure relief; but in the meantime, pain will be constantly at hand.

Swiss Franc Held Hostage by Euro Troubles, SNB’s Persistence

There are two very intense and contrasting forces keeping the Swiss franc anchored: the Euro-area financial crisis and the SNB’s remarkable intervention effort. However, once again, between the extreme depth of the entire market and the limited resources of the central bank, the latter will win every time. That means the spread of the financial strain from Europe to the rest of the world will inevitably swamp the EURCHF’s floor at 1.20 as investors desperately seek safety. However, this is exactly the scenario whereby capital controls and negative rates will be adopted.

Japanese Yen: Government Dependence on Debt to Hit Record 49 Percent

It was reported after the close that Japan’s new budget would require a record 49 percent debt. This gives new meaning to deficits and government leverage. Nevertheless, the yen has maintained its position as a safe haven currency despite developments like these through 2012. Should the European crisis continue to spread to the Asian-region, demand for the yen will remain supported until the BoJ acts.

British Pound: When Will the Market Heed the Bearish Words of BoE’s King?

Over the past months, there has been a warning of the risks that the UK faces that has grown louder and louder. The pessimistic forecast hasn’t come a retired policy maker or some analyst but from Bank of England Governor Mervyn King himself. At the end of this past week, King stated in an official forum that the markets were showing “extreme risk aversion” and that the UK is highly exposed. When will the market pay attention?

Canadian, Australian or New Zealand Dollar Best for a Weakened Carry Trade?

A strong carry currency isn’t just one that will advance when risk appetite is rising. It is also a currency that will curb its decline when the urge to liquidity builds. Between the Australian, New Zealand and Canadian currencies (collectively the comm bloc), the loonie has the best potential for stable performance in a risk-off environment. Already sporting a lower rate, this country is also linked to the preferred safe haven – the US.

Gold Maintains its Fundamental Appeal of an Anti-Currency, But It’s Still Expensive

Gold as an asset is a good hedge to inflation, a unique alternative store of wealth and can avoid the warping influence of policy manipulation. This is a strong resume in these market conditions; so why has it been under pressure through the second half of December? Because it is expensive. When we must liquidate, we unwind the most expensive exposure first to raise capital.

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:01	GBP	Hometrack Housing Survey (MoM) (DEC)		-0.2%	UK housing prices expected to continue weakness as credit tight
0:01	GBP	Hometrack Housing Survey (YoY) (DEC)		-0.2%
17:00	EUR	French Jobseekers – Net Change (NOV)		34.4	French job market still weaker as growth slows
17:00	EUR	French Total Jobseekers (NOV)		2814.9K
23:50	JPY	Corporate Service Price Index (YoY) (NOV)		0.1%	Price deflation still seen to continue

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & SCANDIES CURRENCIES 18:00 GMT

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	16.5000	2.0000	9.2080	7.8165	1.3650		Resist 2	7.5800	5.6625	6.1150
Resist 1	14.3200	1.9000	8.5800	7.8075	1.3250		Resist 1	6.5175	5.3100	5.7075
Spot	13.8500	1.8970	8.1673	7.7778	1.2944		Spot	6.8861	5.6998	5.9764
Support 1	12.6000	1.6500	6.5575	7.7490	1.2000		Support 1	6.0800	5.1050	5.3040
Support 2	11.5200	1.5725	6.4295	7.7450	1.1800		Support 2	5.8085	4.9115	4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3232	1.5775	78.80	0.9514	1.0327	1.0316	0.7871	103.19	123.16
Resist. 2	1.3184	1.5731	78.61	0.9479	1.0296	1.0275	0.7839	102.84	122.82
Resist. 1	1.3136	1.5688	78.43	0.9443	1.0265	1.0233	0.7807	102.49	122.47
Spot	1.3040	1.5600	78.06	0.9373	1.0203	1.0150	0.7744	101.79	121.79
Support 1	1.2944	1.5512	77.69	0.9303	1.0141	1.0067	0.7681	101.09	121.10
Support 2	1.2896	1.5469	77.51	0.9267	1.0110	1.0025	0.7649	100.74	120.75
Support 3	1.2848	1.5425	77.32	0.9232	1.0079	0.9984	0.7617	100.39	120.41

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