Three Forex questions to ask for 2011

DIRECTOR OF CURRENCY RESEARCH, GFT

THE THREAT OF EURO FRACTURE
As 2011 began, Estonia became the 17th country to join the Eurozone but sceptics still insist its days are numbered. Just as in 2010, the sovereign debt issue will haunt the currency while credit markets will be the primary catalyst of the FX trade. The focus will turn to Spain, which faces nearly €200bn of refinancing this year. If it suffers the type of funding crisis that befell Greece and Ireland, the euro may become stressed to the point of fracture – the region’s fourth largest economy may be too big to rescue.

CHINA’S HARD LANDING
News out of China suggests the fastest-growing major economy may be heading for a hard landing or a slowdown at the very least. The latest manufacturing purchasing managers’ index was weaker than expected while the recent rate hike by the People’s Bank of China could curtail consumer spending. Any slowdown will be felt in Australia first. Up to now, the Australian dollar has been unstoppable, rallying to fresh post-float highs of US$1.2057 on the back of strong commodity prices, although its prospects have been dented by the recent floods. But it could easily head towards US$0.9000 in 2011 if investors cut their growth expectations for the region.

US: RECOVERY OR BACK TO DOUBLE DIP?
Recent US data has generally surprised to the upside but labour markets remain depressed. The latest weekly jobless claims dropped below 400,000 but the reduction has yet to translate into any pick-up in labour demand. This week’s non-farm payrolls report could be crucial in determining whether the US labour market has turned the corner. Until now, dollar-yen has failed to rally because traders are sceptical about the US rebound. But if the market is convinced by the US recovery, then dollar-yen could trade to ¥90.00 by end-2011.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.