2011 was not a kind year for mostly everyone involved in the currency markets. Traders generally depend on fundamental data to dictate directions in the forex market, but the uncertainty in Europe and the floundering global economic recovery were a recipe for daily bouts of volatility that had not been witnessed since the timeframe of 2008 and 2009. Choppy markets made setting risk parameters a new art form. Severe market gyrations would wipe out stop-loss orders before ever fixing on the inevitable trend at hand. Acceptable loss levels had to increase for traders to have a chance under these rollercoaster conditions.
Patience and risk management were the watchwords for the year. The year began with a calm optimism that the worst times were behind us and that circumstances would improve on all fronts. Hope quickly transformed into fear as both man-made and natural disasters took their toll. Economic dominoes began to fall in unison, with even gold being knocked from its lofty perch during the latter half of the year. Here is a brief summary of the key events that transpired in 2011:
* 2011 began with a continuation of the Federal Reserve’s second attempt at quantitative easing, dubbed QE2 by the press. Designed to free up banking balance sheets and encourage credit lending to the business community, the central bank purchased $600 billion of securities on the open market, thereby diluting the Dollar via expanding the money supply. The Dollar quickly weakened by over 10 percent relative to other major currencies, but began to rebound when the programme concluded at the end of June;
* In March, a devastating earthquake, followed by an equally devastating tsunami, rocked Japan, stalling their energy grid and export industry in neutral for months on end. The Bank of Japan, along with many other central banks, made valiant attempts to weaken the Yen to enable rebuilding efforts to succeed, but to everyone’s surprise, the Yen proceeded to appreciate by nearly 10 percent for the remainder of the year;
* Oil, like most commodities, benefited from the QE2 dilution of the Dollar. Prices continued their upward swing into May, but soon began a long decline when the global economic recovery faltered. China and other emerging economies began ratcheting back their respective growth engines, reflecting the weakening demand from the West. Commodity currencies, like the Aussie, Kiwi, and the Canadian Dollar, plummeted as a result;
* For better or for worse, Europe was the conductor of the forex orchestra for the last half of the year. Every sliver of news, no matter how significant, would jolt the markets, leading to unexpected volatility at every turn. Traders expect one or maybe two head fakes before a new trend materialises, but a multitude of jerks to and fro was the new reality before any clue was given as to the eventual direction. Eurozone treaty principles blocked the path to a market acceptable solution to the debt quagmire, but the Euro remained above the $1.30 level for most of the year. It has only recently come to light that the repatriation of assets by banks and companies to secure survival on the home front had bolstered the currency above analyst expectations. How long this phenomenon will play out is the unanswered question;
* Within this backdrop, the United States quietly staged a modest economic recovery, resulting in a strengthening Dollar for the near term.
What will 2012 bring? Most analysts expect more of the same. Jon Taylor, one respected industry expert, expects parity between the Euro and the greenback to occur. Only time will tell.
Tom Cleveland
SAXO BANK