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Currency outlook for Q2 2012

Weekly Outlook - 21st June 2012

Written by Zoe Fiddes


The first half of 2012 has been dominated by the intensifying financial stress in Europe, which has created unusual levels of volatility in the market. The bias for the euro remains to the downside, even in light of relatively positive news from Greece after last weekend’s elections. It is difficult to assess how weak the euro may trade in the second half of the year because it is still not clear how or when the eurozone crisis will end. If European officials decide to take bold actions to resolve the crisis there is the possibility of a sharp upward correction in the currency.

While the outlook for Europe still remains uncertain, this may also fuel risk aversion and drive demand for safe haven in Q2 2012, such as gold and the Japanese yen. However, there is some belief in the market that the JPY is overvalued, which may make it less of an attractive safe haven in the second half of the year.

On-going concerns about the US recovery continue to dog the US dollar (USD) and the US presidential election in November may also be a potential negative for the USD. The commodity currencies, such as the Australian, Canadian and New Zealand dollar, felt the pain in Q1 from a slowdown in China and the US economic woes. However, they may make a modest rebound later in the year if central banks plan a coordinated effort to provide liquidity and boost global growth.

Likewise, sterling was slowly grinding higher throughout Q1, supported by safe haven demand. After a sharp fall in May, the currency has regained ground in June and it is possible that further gains may be made if the UK GDP for Q2 shows economic growth and the Bank of England announce that they will not be increasing the asset purchase program.

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