Currencies | Mar 22 2013
By Andrew Nelson
With most now growing increasingly confident the US economy is finally waking from its long slumber and setting off down the road to economic recovery, investors are asking questions about the implications for the US dollar. Analysts at Forex.com have some answers and one is that the dollar will put on a strong show this quarter on the back of the slow but steady recovery in US economic indicators.
With the greenback once again emerging as the growth currency of choice there are many emerging opportunities in the FX market. Some of these include a continuation of recent USD/JPY strength and GBP/USD weakness, especially over the course of the June quarter.
The analysts note that a running greenback would likely make life a little harder for the Aussie dollar, which is struggling under the pressures of slowing growth at home and the slow recovery in China that is expected to rebound, but to a lower base of growth rate. That’s the first piece of good news for Australian investors.
The next piece is that Forex.com also sees a good chance of shares maintaining their recent momentum, extending gains further over the quarter. US share indices the Dow and the S&P 500 have both reached ore very nearly reached record highs in the March quarter, as we know, but the analysts believe we could also see Hong Kong's Hang Seng, the German DAX index and the Eurostoxx 50 actually start to close the gap with their US counterparts.
The team further believes that once this upswing takes hold, there could well be a shift back to value once investors become a bit more comfortable. It all adds up to Forex.com predicting the next few months could be a real “sweet spot” for US investment markets, especially if the Fed keeps monetary policy loose, as expected, and the economy continues to accelerate.
The problem with this dream scenario is that there’s a good chance things may start to head back south for a while as we get closer to the September quarter, given a solid recovery implies an end to the quantitative easing that many investors have taken to use as some sort of security blanket.
Also helping the USD outlook are the woeful conditions still abounding in the UK and Europe. The analysts see the UK entering a triple-dip recession, which would heap pressure on the pound. In fact, Forex.com sees a good chance of the Sterling falling to its lowest level since the Financial Crisis there in 2009.
This quarter is also an important one for the eurozone. The southern countries in the zone are becoming increasingly more vocal in their opposition to austerity. Italy is still rudderless and we have the prospect of some ugly measures being taken in Cyprus, which could set some unpalatable precedents.
The analysts note that any one of these could provide the spark that lights the fuse of a falling euro and worse, the resurgence of the sovereign crisis that we had all hoped was put to bed. And we all know if this plays out, like it or not, we’re in for another rough ride as global volatility levels surge and spike.
These views have given birth to some predictions from Forex.com:
Forex now expects the USD/JPY uptrend will continue through this quarter regardless of what the Japanese do, instead of believing the main driving factor will be developments in the US and at the Fed. In Q2, the analysts see USD/JPY pushing as high as 100.00.
As far as the EUR/USD goes, Forex.com predicts it will grind its way back the mid 1.20s once it has become patently clear that a bullish stance for the euro is unsupportable.
The green shoots of what we all hope will be a continued recovery in Japan and the US is certainly supportive of a "risk back on" mindset, but Forex.com warns investors need to be careful, especially given the good chance Italy will again be sucked back into the sovereign crisis.
A re-slowdown in China is also possible and that would also cause volatility to jump and that’s not even mentioning the economic impact it would have on Australia and subsequently, the Aussie.
Despite the woeful outlook in the UK, the team does predict the FTSE will likely buck the UK economic trend and follow US markets higher. The team also thinks relative valuations could see the German DAX outperform the Dow.
The ongoing monetary and economic uncertainty is likely to be of no assistance to gold bugs, with Forex.com predicting the yellow metal will remain range bound as long as concerns about global inflation pressures remain on the back burner.
Given a flat outlook for gold, the analysts see a good chance copper may overtake the gold/silver ratio as a barometer for global economic growth. And lastly, the analysts think the spread between UK and US oil will continue to narrow given US energy demand continues to be met domestically.
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