(As written for My Paper for 10 January 2012 issue. Click here to enlarge)

It’s good to be back in the currency market after a three week break.

For my first article of 2012, let’s take a snap-shot of the world’s biggest economies to see how they fared for 2011. This can give us excellent insight into how they might perform at the start of 2012.

According to the list by the International Monetary Fund for 2011, the top 3 economies (by country) are as follows:

1. USA: USD 15.06 trillion

2. China: USD 6.99 trillion

3. Japan: USD 5.86 trillion

The GDP for the European Union comes in at USD 17.96 trillion, which is higher than the USA, but that is a coalition of 27 member states, as opposed to a single country.

1. Japan

Things are not looking up for Japan. In terms of political confidence, Japan has the embarrassing distinction of installing their 7th Prime Minister in just over 5 year. This happened when Yoshihiko Noda took over from Naoto Kan in September 2011.

In terms of consumer confidence, the savings rate has dropped dramatically, and a constant trade surplus is now in now hanging in the balance. The country has a gross national debt equivalent to 230% of GDP, helped in no part by its fourth stimulus package which was recently passed.

The Nikkei has fallen about 15% for 2011 and the Yen is near record highs. This shows that investors have on-going concerns for the Asia-Pacific region.

2. China

China’s growth is slowing. Although it recorded growth of 9.2% in 2011, that number may slow to 8.5% in 2012, percent in 2011, according to the median estimate of economists in a recent Bloomberg News survey.

Property transactions are also continuing to slide. All this caused the People’s Bank of China (PBOC) to lower the reserve ratio for the first time in almost three years to encourage lending and rev up growth.

In terms of market performance, the Shanghai Composite Index ended 2011 about 18% down, although the Yuan gained 4.7%. In fact, just last month, the USD/CNY rate recorded a figure below 6.3 for the first time in 18 years.

This gives us an impression that the central bank favours currency appreciation to prevent capital outflows.

3. USA

In a year which saw: the S&P downgrade its credit rating, the deadlock between its politicians on raising the debt ceiling, the end of QE2 and the start of Operation Twist, the political scene for the USA was certainly high in entertainment value.

Interestingly, the US dollar has done remarkably well in 2011 even in the face of all these problems. The Dollar Index advanced 1.6% in 2011 after a 1.5% gain in 2010.

This gives further testimony to the strength of the dollar as a safe haven currency.

Last week, Non-Farm payrolls printed at 200K, recording the sixth consecutive month of triple digit gains in jobs. The figures point to the fact that the US market is likely to outperform Europe in the first half of the year.

4. Europe

2011 was a year which saw the European debt crisis spread move from the so-called periphery countries (such as Greece, Ireland and Portugal) to the core of Europe.

The big-four Spain, Italy, France and even Germany experienced some strain in their fiscal activities, most notably in bond auctions. The ECB also loaned a massive €489 billion to over 500 banks for an exceptionally long period of three years.

It was the biggest ECB infusion of credit into the banking system in the 13-year history of the shared euro currency, and it was done to ensure that banks had enough cash for lending.

As of this week, the Euro is trading at a 16 month low against the US dollar and a 12 year low against the Yen.

Trade Call

Short EUR/USD at 1.2764

EUR/USD has fallen over 400 pips in the last one week, putting in on a firm downtrend. On the H1 chart, EUR/USD is currently retracing into a small range. We will go short once prices re-test the conversion area of 1.274.

A stop loss of 52 pips is placed 4 pips above the previous high of 1.2812. Since this is a trend play, we will have 2 targets, exiting the final position at 1.2660.

Entry Price = 1.2764
Stop Loss = 1.2816
1st Profit = 1.2712
2nd Profit = 1.2660

(As written for My Paper on 12 December 2011. Click here to enlarge)

The recently concluded EU Summit in Brussels last week answered some tough questions.

Here’s some of the highlights:

1. War-chest topped up with 200 billion Euros

The Eurozone’s central banks will contribute 150 billion Euros, while non-Euro EU states will chip in the remaining 50 billion Euros. Part of the plan is to calm global fears and attract rich nations like China to join in the rescue.

China’s response though, was muted and non-committal with Foreign Ministry spokesman Hong Lei saying that “we note Europe’s important proposals to deal with the debt crisis.”

2. New Rules Instead of New Treaty

The European leaders set a deadline of March 2012 to write a new pact on economic governance to limit future budget deficits and public debt.

This is not a full treaty revision – which would require the unanimous nod across all 27 EU members – because Britain opted out. U.K. Prime Minister David Cameron refused to back the pact without ironclad guarantees of a British veto right over future financial regulations.

Strangely enough, this could turn out to be a blessing in disguise, as rewriting the EU treaty could take years and underscore an immediate plan required to stem the European crisis.

3. The “Golden Rule”

The “Golden Rule” requires each country to establish an “automatic correction mechanism” when budgets run off-course. The rule also caters for disciplinary procedures and controls to kick-in when governments overstep the deficit limit of 3% of GDP for annual borrowing and 60% of GDP for total public debt.

All these moves are in the right direction to reign in sovereign debt.

As it is, European governments face maturing debt of over 1 trillion Euros by the end of 2012 and more than half of that amount will be due by June next year. Interestingly enough, that amount is owed by Europe’s 3 largest countries – Italy, France and Germany.

Can the Euro be saved?

That question ultimately depends on 3 important groups: investors, central bankers and credit-rating companies.

Top News This Week

GBP Retail Sales m/m. Thursday, 15 December 2011, 5.30pm. I expect figures to come in at -0.2% (previous figure was 0.6%).

Trade Call

Long XAU/USD at 1670

Gold has risen 21% to $1,717.80 an ounce this year on the Comex in New York, and reached a record $1,923.70 in September 2011.

Last week, Wagers on Gold has also climbed 3.5% 151,347 contracts, snapping two weeks of declines. Bullion traders are piling into Gold to protect their wealth from Europe’s escalating debt crisis. Even South Korea announced last week that it bought 15 tons of Gold in November to diversify its foreign-exchange reserves.

On the daily chart, a bullish pennant is spotted.

An entry is taken at 1670, and a protective stop is placed at 1599, just below the previous low of 1603.71 achieved on 20th October 2011.

We will have 2 profit targets on this trade. The first position will exit at 1740, and the second position will exit at 1810.

Entry Price = 1670
Stop Loss = 1599
1st Profit = 1740
2nd Profit = 1810

(As written for My Paper on 6 December 2011. Click here to enlarge)

There were two headlines late last week that caused a rally in the risk currencies.

Firstly, it was the surprise announcement by the major central banks to boost liquidity. In a coordinated action to ease credit lending, six central banks agreed to reduce the cost of temporary dollar loans offered to banks by half a percentage point. The facility, called liquidity swaps, began yesterday and will run through to 1 February 2013.

Will the risk rally be sustainable? Not in my view – and here’s why.

By cutting the rate on dollar swaps, the cost of overnight borrowing for banks will decrease. This will increase the flow of dollar liquidity to European banks, which are struggling to attract funding at the moment. That’s the good news.

However, the expansion of credit lines has done nothing to address the structural problems currently facing Europe. To put it simply – the central banks are treating the symptoms, not the cause.

In fact, traders will be more concerned about the upcoming meeting between the EU leaders in Brussels this week.

The second headline hit the markets on Friday – when the US Labour Department said that the unemployment rate dropped to 8.6% last month from 9% in October.

This was the lowest rate recorded in over 30 months.

Payrolls had also increased to 120,000 after a 100,000 revised gain in October.

The “good news” fueled risk appetite and caused the risk currencies to strengthen against the US dollar again.

Will the risk rally be sustainable? Not in my view – and here’s 2 reasons why.

Firstly, more than half of the 120,000 new hirings came from retailers and temporary help agencies. This is expected, considering the extra help needed to boost spending during Christmas season.

Secondly, and more importantly – one of the major factors which caused the unemployment rate to fall was because 315,000 Americans left the labour force.

This group had given up looking for work and were no longer counted as unemployed. Suffice to say, the shrinking workforce contributed to the decline in joblessness in the USA, although they still remain unemployed.

Hence, in light of the discussion above, it would be a mistake for retail traders to think that the worst is behind us.

Top News This Week

Its interest rate week, and the major central banks from Australia, Canada, New Zealand, England and Europe will be announcing their respective central bank rates.

I expect all to pause rates, except for Australia, which could cut rates to 4.25% (from 4.5%) on Tuesday, 6 December 2011, 11.30am.

Trade Call

Short AUD/USD at 1.0165

Australia’s inflation fell to a two-year low in November, coming in at 2.1% compared to 2.6% in October. This could be a potential reason for the RBA to cut rates.

On the hourly chart, a range of 155 pips is spotted, with resistance located at 1.0330 and support located at 1.0175.

The bias is to the downside if the RBA cuts rates.

An entry is taken at 1.0165, 10 pips below the support level. A protective stop is placed 50 pips above the entry price at 1.0215. We will have two profit targets on this trade, exiting the second and final position at 1.0065.

Entry Price = 1.0165
Stop Loss = 1.0215
1st Profit = 1.0115
2nd Profit = 1.0065

(As written for My Paper on 29 November 2011. Click here to enlarge)

Traders and investors are highly concerned about the on-going debt crisis in Europe. So, what is the one crucial clue that is a clear indicator that risk? The clue lies in bond yields. By definition, a bond yield is the return an investor would earn if a bond was purchased and held to maturity.

It also represents the interest the bond issuer has to pay to borrow the money. Suffice to say, the higher the yield, the more money the issuer has to stump out to repay the bondholders.

What drives yields up or down? Yields move inversely to bondholders’ confidence. When confidence is high, yields are low. When confidence is low, yields are high.

Countries with low bond yields typically exhibit strong fiscal and robust growth.

Let’s consider 10 year government bonds in Singapore and Greece. The yield is under 2 per cent for Singapore, but about 29 per cent for Greece.

This tells us that investors demand a premium to loan money to Greece.

Despite the bad news, all of the risk currencies – EUR, GBP, AUD, NZD and CAD gapped upwards against the USD when markets opened yesterday. This was mainly due to a report by Italy’s La Stampa newspaper, which reported that the International Monetary Fund (IMF) may be preparing a loan of 600 billion Euros (S$1 trillion) to Italy. However, an IMF official later denied the report.

Until a concrete plan is seen in Europe to stem the crisis, traders will remain short on the five risk currencies mentioned above.

Trade Call

Short AUD/USD at 0.9815

On the hourly chart, a range of 233 pips is spotted, with resistance located at 0.9894 and support located at 0.9661.

The bias is still to the downside, with a strong preceding downtrend, and with the Australian dollar being one of the first to react with on-going problems in Europe.

An entry is taken at 0.9815, 79 pips below the resistance level. A protective stop is placed 85 pips above the entry price, located just outside the range. We will have two profit targets on this trade, exiting the second and final position at 0.9645.

Entry Price = 0.9815
Stop Loss = 0.9900
1st Profit = 0.9730
2nd Profit = 0.9645