(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