Richard Driver, Analyst With many traders off on their Christmas holidays already, markets are very thin indeed now. US GDP was surprisingly revised downwards for Q3 of this year, revealing growth at an annualised rate of 1.8%. Still the market was not too bothered, comforted by the pick-up in US growth we have seen in the final quarter of the year and the improved outlook for 2012. Today’s session brings plenty of US data but if yesterday’s GDP figure failed to leave an impact, today’s releases will also go unnoticed. From all the team at Caxton FX, have a great Christmas.
STERLING/EURO: Sterling’s safe haven bid continues to provide support against the single currency, helped by improved UK GDP figure. UK GDP hit 0.6% in the third quarter of 2011, which was slightly better than expected. The market will be all too aware that the outlook for the UK economy leaves little to get excited about, but the GDP figure was still a nice surprise. Less positive was news that the UK’s current account deficit widened to its worst level in almost a year and a half. The safe-haven attraction of UK gilts, and sterling by association, has taken sterling up above €1.20, its highest point since early January 2011. Further gains are likely to come, but perhaps not today.	FORECAST
STERLING/US DOLLAR: This pair remains range bound as data fails to leave its mark and as the flow of headlines dries up. US GDP was revised downwards to 1.8% (annualised) for Q3 2011. This 0.2% downward revision is actually pretty disappointing but the markets didn’t respond. The Wall Street Journal has reported that the US Federal Reserve could leave interest rates at their current record lows of 0.25% until 2014 and beyond. This is dollar-negative in the long-term but will not worry the markets in the short and medium term. Sterling is trading at $1.57, which represents a stronger finish to the year than we expected. Despite a warning from Moody’s about the UK’s treasured triple-A rating, sterling has done traded very well in the past fortnight or so.	FORECAST
EURO/US DOLLAR: The euro continues to hover above the psychological $1.30 mark but we are still anticipating another push lower. ECB policymaker Smaghi has called for quantitative easing to boost the eurozone economy if deflation risks emerge moving forward. With QE consistently ruled out by the ECB, this is an interesting development and will certainly have caught the market’s eye. Unfortunately for the market, which would welcome eurozone QE strongly, Smaghi’s tenure at the ECB ends very soon so hopefully he will persuade some of his colleagues before doing so. The euro is trading at $1.3075 this morning, European stocks have opened strongly, so a push below $1.30 may have to wait until after Christmas and perhaps the New Year.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Aussie trading positively, helped by demand for Australian government bonds. Australia has also managed to maintain its AAA credit rating, and demand for its government bonds is giving the aussie dollar some decent support. This club of top-rated government debt will continue to shrink and for those nations that hang on to it, the associated currencies will reap the rewards. Sterling is trading at 1.5450 this morning, and no major movements seem likely.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling edged lower against the kiwi dollar despite the worrying news of another earthquake in Christchurch. Christchurch is still bouncing back from the destructive earthquake we saw in the city earlier on in the year. Another quake will strengthen the case for another interest rate cut from the Reserve Bank of New Zealand. The kiwi dollar still managed to strengthen against sterling however, helped by some positive weekly jobs data. Despite losses in Asian stocks last night, this pair is trading down at 2.0250, and we may see a session of range-bound trading.	FORECAST
STERLING/CANADIAN DOLLAR: The loonie continued to make gains over sterling yesterday, helped by a decent bounce in the US stock market. Positive US risk sentiment drove the Canadian dollar forward yesterday, traders turned a blind eye to the downward revision of the US GDP figure and focused on some improvements in the US labour market. US unemployment continues to be the number one concern in the US economy. This pair is trading at 1.60 this morning. We have a monthly Canadian GDP figure later today, which expected to show growth of just 0.1%, but as ever US GDP will probably overshadow.	FORECAST

Financial recovery stalls in 2011 but will next year be any better?

An article from James Hickman, MD of Caxton FX, reviewing the past year and what we can expect in 2012.


What a year 2011 has been: the uprisings in the Arab world, earthquakes in Japan and New Zealand and not to mention the deaths of three dictators, the Royal Wedding and the London riots.

In terms of the financial environment, if we look back to the end of 2010 we were still waiting for conditions to improve for the global economic recovery and as we approach the end of 2011, we still cannot see the wood for the trees.

2011 was meant to be a year where we took bigger steps towards the goal of economic improvement but in my mind, there have been two key factors which have prevented this from happening.

Firstly, there has been a top-down liquidity squeeze which has had a significant impact on everyone from countries and large banks right down to individuals and small businesses.

In short, no-one can easily borrow money and as we all know, accessing affordable loans is key to a vibrant and growing economy, whether you are the government or a small shop keeper.

What this has resulted in at the top end – which is the really worrying part – is that some countries have been unable to repay existing loans and debts. Consequently, some loans have been written off causing share values to plummet and the very real situation of some of those countries staring default in the face.

The second key factor in the global economic recovery, or lack of it, has been the financial mess within the eurozone.

The European Central Bank (ECB), working alongside the central banks of the 17-member states of the eurozone, have been too slow to react to the debt crisis over 2011 and have constantly been playing catch-up, despite several crucial summits over the year.

This has seen the markets respond negatively towards this inertia and subsequent bailouts have required strict austerity measures, which as we have seen in the UK, are not looked on in a favourable light by the local populous, as well as being hard to implement.

The knock-on effect of this has seen the euro, which has been pretty strong since 2007, depreciate against most major currencies since the summer. While a cheaper currency is a good thing for exporters, importers looking to bring in goods from economies linked to stronger performing currencies, such as the USA and UK, will find it tough to buy goods and services when the dollar and sterling are performing so well.

So what’s in store for 2012? Unfortunately doom and gloom still holds centre court and we predict that the issues that we have talked about so far will continue to rear their ugly heads well into 2012.

There is a strong possibility that the euro will continue to weaken well into Q1 and Q2 and we might also see some of the periphery eurozone states start to drop out of the single currency.

If I were a betting man, Greece would be a good shout for being the first to drop out of the single currency as they will find it hard to stick to the ECB’s fiscal measures which are proving deeply unpopular at home.

Greece’s departure could also cause a domino effect with other weak eurozone states also dropping out of the single currency.

But I think it’s incredibly important to note that we don’t see the euro completely collapsing any time soon – so there’s no need to panic. There appears to be the political will to keep the single currency project alive and with weaker countries dropping out, the remaining countries will see a reverse in fortunes and could actually see the euro strengthen again.

Closer to home, we see sterling maintaining its current position as being one of the stronger currencies. While a strong pound is an advantage for importers, taking advantage of being able to bring in cheaper goods, it will be expensive to export British goods - especially to the eurozone – which raises further concerns about the UK’s trade deficit.

Considering our high debt levels and the fact that everyone wants to see a weaker pound, we might see further Bank of England (BoE) intervention to try and weaken sterling, as well keeping interest rates at a record low of 0.5%.

Another question at the front of peoples’ minds is whether we will experience a recession in 2012. While the markets have responded warmly to the Government’s austerity measures and growth is flat rather than negative, all of this will be blown out of the water if there is a recession in the eurozone, an event which is more than likely.

The eurozone is our most important trading partner and if there is recession on the continent, this will interrupt trade flows and hinder the amount of business UK companies can carry out.

Nonetheless, if we do see the weaker eurozone nations drop out, the consequences will be only felt by the UK in the short-term and we will eventually see a balancing act where the eurozone will regain its strength.

In terms of currency and considering that our outlook for both the global economy and the eurozone debt crisis is negative, as a final thought, we see the euro losing ground against both the dollar and sterling in 2012. Additionally, the dollar should outperform the pound in risk averse circumstances next year and maintain its position as a safe-haven currency.

Produced by Steven Fifer, Caxton FX