OANDA Review and expectations for 2012/13

OANDA

 

Review and expectations for 2012/13
by Dean Popplewell

Implied forex volatility has declined substantially since last summer. The key components for this unpredictability over the last year have been the movements of various countries’ credit and swap yield spreads, notably those of Spain and Italy. Currently, the market expects little room for divergence in monetary policy amongst the core G10 currencies – with possibly one exception, Japan. The new LDP government seems determined to influence the Bank of Japan (BoJ) to unleash an aggressive policy change throughout 2013. This would certainly pressurize the Yen to trade lower. Who said we were not about to enter a currency war? As an aside of the Asian effect, this should lead investors to continue FX ‘range trading’, and to expect the current low-volume environment to persist.

 

The market is looking at the EUR to come under renewed pressure in Q1 when we witness the return of Spanish issuance, which should cause some widening of sovereign spreads. Investors can expect these spreads to tighten only if Spain enters an OMT/ESM program. For now, the market is relying on the good nature of the European Central Bank’s commitment to OMT to keep Spanish yields in check. EUR’s expected weakness implies that the central European trio of HUF, CZK and PLN, along with the Scandinavian couplet of NOK and SEK, could be vulnerable in early 2013. However, many expect that with an accommodating central bank, and with the European Union’s largest economy, Germany, gradually finding traction, the EUR should be capable of dragging the aforementioned currencies higher by year-end. Few investors expect the EUR’s 2012 year-end rally to be sustainable. Others believe the EU’s uncertain growth prospects, coupled with a dubious outlook for the region’s systemic stability, will end up hindering the single unit for most of 2013.

MarketPulseFX

 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Source: OANDA

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