A muted end to forex trading for 2010, with the euro looking to set to finish close to recent lows and continuing to bounce off the 200 day moving average. My forecast for early next year, is to expect further weakness to develop in the short term, as European leaders appear unable to agree on a comprehensive solution to the continuing debt problems in the region. However, it is interesting to note in this morning’s thin trading that the euro managed to shrug of the recent downgrade for Portugal by the Fitch rating agency, which lowered the country’s long term and local currency ratings by one notch to A plus late yesterday evening, and as such aligning the rating with that of Moody’s, but two notches above the A minus held by Standard and Poor’s. In the statement Fitch also added that it was “keeping a negative outlook on Portugal, saying it expected the country’s economy to return to recession in 2011.
The debate in Europe of course is centred on Germany, which has rejected the need for closer fiscal integration, in other words Eurobonds and the ECB, which could be forced to buy these unwanted bonds from weak member states, with the ECB propping these countries up as a result and potentially threatening it’s balance sheet and credibility. As such there remains the possibility that the ECB could step back from potential bond purchases, and instead let the markets decide where the future of the euro lies. If this were to occur, then the result for the European currency would not be pretty, with a potential collapse the likely outcome. However, if the ECB do indeed step in to support bond sales, then the markets could cry foul, and accuse the ECB of quantitative easing by the back door! Either way, the short term outlook for the euro looks bearish as we move into the first quarter of 2011, and any break below the 1.2950/1.3000 region should signal a sharp move lower towards the 1.2550 price area in due course. Across the pond, the US outlook continues to improve, with the US dollar helped by the recent tax cut extensions, and although I expect to see the dollar climb higher, this could be in a series of steps as concerns over rising debt continue to play in the background.
Looking further ahead in 2011, I expect to see the major currencies ( euro, dollar, UK pound and yen) exhibit weakness against stronger performing minor currencies such as the Aussie dollar, the Swiss Franc, the NOK, SEK, ZAR and MXN. That’s about it for this year – have a great holiday and looking forward to seeing you again in 2011.