Looking ahead to 2011: some likely winners and laggards

FROM sovereign debt crises threatening the very future of the euro to currency wars and more quantitative easing, 2010 has been an eventful year in the foreign exchange markets.

Currency traders will be pleased to hear that volatility, which has been so characteristic of the FX markets since the crisis, is unlikely to disappear any time soon. Consequently, there will still be plenty of daily moves for currency traders to capitalise on.

But which currencies are likely to be the winners or the losers next year? Societe Generale’s Kit Juckes says: “Barring a dramatic change, the scene is set for the 2011 currency outlook to be dominated by Fed accommodation, European Central Bank (ECB) fire-fighting to save the euro, and the response of almost every other central bank in the world to currency appreciation.”

He reckons we will see a weaker euro and dollar with the latter likely to win the losers’ race. In contrast, the Aussie dollar and the Norwegian krone will benefit from interest rate differentials, solid fundamentals and appetite for natural resources.

Here we take a look at six of the most popularly traded currencies and what analysts expect 2011 is likely to hold for them.

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US DOLLAR
It has not been a good second half of the year for the greenback, which has come under pressure from a sluggish US recovery and additional quantitative easing by the Federal Reserve.
Opinions are somewhat divided about the outlook for 2011. Some analysts point to the need for rebalancing, which is likely to be very dollar negative over the next few years. Equally, further QE would weigh on the greenback.
But others say that since the dollar has fallen against almost every other G10 currency over the past decade, being bearish on the dollar “is somewhat in the price” now.
But dollar buyers should remain cautious as there is the potential for a major dollar fight-back as a result of risk aversion, says Mark Deans, dealing manager at Moneycorp.

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EURO
2010 will be a year that members of the euro will want to forget. As the year draws to a close, the future of the euro is still under threat – although the odds suggest the single currency is likely to survive for now. Over the next few months, the euro is expected to continue to come under pressure but FX strategists reckon that pressure on the dollar will be greater because of high unemployment in the US. Barclays Capital’s Paul Robinson thinks that it’s unlikely that the euro will sink against the dollar to the level it reached in June. He has reduced the three month forecast to $1.28 but raised the forecast for end-2011 to $1.42. Others are more bearish: although Xenfin Capital’s Luca Rubinelli thinks the pair could trade higher in the near-term, he foresees $1.20 by the end of 2011.

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BRITISH POUND
For a currency that has spent most of the year plagued by fiscal and political crises, sterling has not done too badly. While concerns about further quantitative easing from the Bank of England and the risk of contagion from the Eurozone remain, these worries are starting to dissipate.
A sluggish US recovery and loose monetary policy should keep the pound well supported against the dollar with some predicting $1.82 by end-2011.
Yet it is still all too easy to be a sterling bear. Stephen Gallo at Schneider FX says: “From the perspective of trade and financial flows alongside the UK’s fiscal imbalance, there is certainly no shortage of downside risks to sterling that need to be squared over the medium-term.”

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JAPANESE YEN
Against all odds the Japanese yen has managed to remain very strong, trading at around ¥83 to the dollar yesterday. Japanese exporters have revised their currency estimates to account for a stronger yen.
Xenfin trader Ian Langton agrees: “We foresee the emphasis shifting to focus on the negative US balance sheet and the Fed’s increased stimulus. Alongside more risk averse trading, this could see the yen strengthen further to test a 15-year high.”
But since dollar-yen is the most sensitive major dollar pair to changes in US yields, if US yields start to rise, the yen would fall against the dollar. “With a predicted pick up in risky assets in 2011, the yen will likely be sold by traders looking for carry trade plays elsewhere,” says World First’s Jeremy Cook.

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AUSTRALIAN DOLLAR
A combination of (relatively) high interest rates, exposure to commodity demand and the distinction of being one of the few advanced economies to escape recession has kept the Aussie dollar in demand. It hit parity with the US dollar a month ago and traded back through this level on an intra-day basis yesterday.
The Aussie is likely to see some dips in 2011 – with the key risks being Chinese tightening and risk aversion. “Among all the G10 currencies, the Aussie remains the most sensitive to yuan moves. The market will need to adjust to tighter conditions in China. The immediate impact may be brutal on the FX markets,” says BNP Paribas’ Ian Stannard.
But the Aussie remains a clear favourite and SocGen’s Juckes believes it could still have further upside against the US dollar.