FYI | Apr 02 2012
– FOREX.com updates outlook for 2Q12
– China slowdown a concern, US data suggest Fed will remain on hold
– No certainty Eurozone sovereign debt crisis has passed
– Tougher quarter for equities expected
– Commodity prices could rise further
By Chris Shaw
As the June quarter gets underway FOREX.com has released its markets outlook for the period, suggesting an uneven world growth outlook will continue to impact on financial markets in coming months.
In recent weeks FOREX.com notes fundamentals in the US have noticeably improved but the outlook for China has weakened, again raising the question of whether a hard landing for that economy can be avoided. (Note: the Q2 outlook was released prior to the latest China PMI release).
Elsewhere, Europe appears to be entering a two-speed growth trajectory, with FOREX.com expecting peripheral countries are likely to struggle to climb out of recession while core countries may experience shallower and only temporary declines in economic activity.
Specifically, FOREX.com notes the improvement in the US economy has generally been better than expected, with growth higher and unemployment falling. As a result, the US Federal Reserve is likely to keep policy on hold rather than introduce new measures such as QE3.
The extent and pace of the slowdown in China is a concern for coming quarters, but FOREX.com suggests data would need to continue to disappoint and inflation trend lower before there is any increased potential for cuts to reserve requirement ratios.
Eurozone data appear to confirm the region is in recession and FOREX.com expects demand will remain weak in coming months. There is no certainty the worst of the sovereign debt crisis has passed, with Portugal and Spain likely to be in the spotlight in coming months and Greece remaining a loose cannon.
Moving into the second quarter, FOREX.com notes the European Central Bank (ECB) appears less likely to offer support to peripheral markets in Europe, the focus now on how governments can support themselves. This implies a wait-and-see approach with respect to policy in coming months.
Turning to Australia, FOREX.com notes the global economic slowdown and the possible hard landing in China have weighed on the economy, as growth remains stuck at a sub-trend pace. This below trend growth should continue through the first half of this year given high interest rates and ongoing pressures from offshore, before an improvement in the second half can materialise.
Unemployment in Australia should tick higher in coming months, with the health of the labour market expected to be key behind any move in interest rates. FOREX.com notes the Reserve Bank of Australia (RBA) continues to focus on the divergence between different sectors of the economy, so no change in monetary policy is expected in the current quarter.
In terms of what this outlook could mean for stocks, FOREX.com anticipates a tougher quarter as investors turn their focus to growth and the future direction of central bank policy. Inflation remains an issue for equity prices given the oil price is at multi-month highs and appears unlikely to retreat anytime soon.
The strength in oil prices could weigh on economic growth, so barring any unexpected events FOREX.com suggests any further moves higher in stock prices could be shorter than in the first quarter and profit taking may emerge around some major levels in indices.
In the June quarter commodities should approach a crossroad in the view of FOREX.com, as central banks appear unlikely to ease financial conditions further given fears of inflation while global de-leveraging is beginning to impact on growth.
Any hint of easier monetary policy could spark a further rally in commodities, with FOREX.com suggesting the precious metals remain best-placed to remain in vogue in the second quarter. For gold specifically prices are likely to test highs near US$1,790-$1,805 per ounce in the quarter, with further advances likely in the second half of this year. Silver could similarly re-test 2012 highs in coming weeks and could potentially make a run at US$40 per ounce, while copper should continue to enjoy some fundamental support in Q2.
Crude oil prices have surged so far this year, helped in the view of FOREX.com by still strong demand from emerging economies. This suggests pullbacks in the oil price will be limited and a test of the 2008 high of around US$147 per barrel for Brent Crude is seen as possible in the June quarter.
The resolving of supply outages, an easing in geopolitical tensions and any tapping of the US Strategic Petroleum Reserve appear more likely to be second half scenarios, so there appears little to drive down oil prices in coming weeks.
Turning to currency markets, FOREX.com expects ranges for EUR/USD of 1.25-1.35 for the quarter, with risk of a move to 1.20 if prices break below 1.25. For USD/JPY a range of 80.00-90.00 is expected, with risk of a move to 95.00 if prices move above 90.00.
For the AUD/USD, FOREX.com expects a range of 1.0250-1.0850 with risk of a move to 1.00 on any break below 1.0250, while for the NZD/USD pair the expectation is a range of 0.8500-0.7700 with the risk being a move to 0.7500 on any break below 0.7650.
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