Currencies | Dec 13 2012
By Andrew Nelson
US based online trading company GAIN Capital has released its Q1 2013 Market Outlook report and it’s not looking great if the US heads over the "cliff". There would be a steep increase in market volatility and a quick retreat in recently budding risk sentiment, especially if the US economy were to head back towards another recession.
Kathleen Brooks, Research Director at FOREX.com notes that were the US to go over the cliff, the US dollar could attract safe haven flows and stocks may sell off like we saw during debt ceiling negotiations in the US in August 2011.
Thus, the US dollar and markets in general are faced with two important events in Q1. The first is the outcome of fiscal cliff negotiations. The second event that is a little more important for the dollar is the changing of the guard at the Federal Open Market Committee, which could bring a dovish bias at the US central bank.
The outlook for Europe isn’t offering any help either, with 2013 set to mark the fourth straight year of sovereign debt issues, an fact that is constantly undermining global investor confidence. The funny, or rather tragic, point here is that in four years it seems Europe is still moving further from any sort of resolution, with the crisis expected to flare up again in the coming year at some point. Analysts from FOREX.com expect that Spain’s financial position will remain a sticking point for confidence levels, while they mote the actual fall-out from refinancing Spain could be even worse.
Why? Because a full bailout of Spanish debt could cause a major spike in market volatility and a big drop in the euro. Not helping matters during the first quarter of 2013 is the likelihood of former prime minister Berlusconi getting back into office after the upcoming general election in Italy. Nobody wants a conman [Berlusconi was charged with tax avoidance] running Italy, except the Italians it seems.
Still, the way things are at present, Ms Brooks believes that after a period of intense risk aversion, we could see markets start to recover in late Q1.
“From a macro perspective, the US could join the Eurozone and Japan in falling back into recession, which may ignite a global decline. Without a bold solution to the European debt crisis and a deal in Washington we cannot envisage a significant pick-up in global sentiment in the first quarter,” she said.
Thus, the outlook for EUR/USD is bleak, with FOREX.com noting the chance of some sharp declines over the quarter as sovereign concerns, especially in Spain, start to heat up. The AUD, CAD and NZD will also likely remain subdued, as these are seen as commodity currencies, which tend to be the most sensitive to the bleak global growth outlook.
There is some good news for China in the report, with the analysts noting the signs Chinese growth is starting to pick up, which should boost the renminbi during the first quarter of 2013. Meanwhile, gold and silver may be in for a tumultuous ride as two opposing forces, weak global growth and fresh monetary stimulus could well end up impacting the precious metals space, seeing gold and silver court in a sort of tug of war.
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