A new year in Forex

While the FX market takes a breather over the festive season, we thought it might be a good time to reflect on the year that was and what we might expect to see in 2012.

Last year can be described as one of the most volatile year in both currency and equity markets in recent memory. The big winners throughout the year were the safer currencies such as the CHF, AUD and the NZD. For example, the USD/CHF dropped from approximately 1.06 at the start of the year to a low of 0.804 before rallying slightly to finish the year at about 0.93. This represented a large sell off of the USD in favour for the CHF. The EUR/CHF fell much more heavily starting at close to the 1.50 mark falling to approximately 1.2. The financial crisis during 2011 is largely responsible for this trend.

Perhaps the most interesting case study was the EUR/USD which waged a tug-of-war (shown below) throughout the year reflecting both economies internal issues. First there was movement towards the EUR with the pair rallying strongly, and then in the latter half of the year the USD fought back as the U.S economy showed some signed of live with the unemployment rate falling during the last reporting period.

What might we expect in 2012

We believe that equity markets will remain volatile for the first half of the year which should be able to produce some profitable opportunities for astute traders. The volatility will largely arise from developing situations in Europe. Although some progress has been made politically during 2011, the damage that has occurred over the preceding decades will take years to sort out. For this reason, we see headlines out of Europe dominating FX and equity market volatility.

As for the U.S, it is more of a case of “wait and see”.  The latter half of the year saw significant improvement in key economic numbers, including the jobless rate. This translated in a significant movement towards the USD in the EUR/USD, AUD/USD, USD/CHF and other pairs involving the USD. If good news continues to filter through then this trend could continue in 2012.

Of the major currencies, the GBP had the least volatile year remaining relatively constant against a number of major currencies. This is due to the news out of that region not being nearly as bad as other parts of Europe. We see this trend continuing into 2012.

Happy New Year and Happy Trading!