From the December 01, 2010 issue of Futures Magazine • Subscribe!

Hot markets for 2011: Hopes and questions

As was to be expected, much of the forex sector’s direction for 2010 was determined by the U.S. economy and the European sovereign debt crisis. Throughout the year, we saw the dollar strengthen before weakening, the euro dip below 1.20, the Aussie and Canadian dollars go near parity with the U.S. dollar, and the yen strengthen to a 15-year high. Much of next year’s direction will be determined by the world’s perception of QE2 and economic expansion or retraction for countries in 2011.

Dolan expects the euro to be the currency hit hardest next year as the European Central Bank (ECB) removes stimulus, resulting in weakened growth outlooks. "Depending how big the slowdown in 2011 is, we may see weaker growth outlooks reignite sovereign debt concerns," he says. "That will be the catalyst for the euro testing below 1.20 and moving down to 1.10-1.05. The Europeans are pursuing austerity measures and that is not going to be good for an economic impact."

Commodity currencies, specifically the Australian dollar and Canadian dollar, look to continue their expansion into next year. According to Dolan, this is because they are likely to resume their interest rate hikes.

Streible says the Australian dollar will be one of the firmer currencies based on its relationship with China. "They depend mostly on China and China is continuing to expand. Australia is constantly creating jobs, has low unemployment, good inflation and they are raising rates." He sees the Aussie trading on par with the U.S. dollar next year. Dolan is more bullish, seeing the Aussie move into the 1.04-1.07 level and the Canadian to trade in the .93-.96 area.

Murky waters ahead

The year started with high hopes that as the U.S. finished the first round of quantitative easing, the world would begin seeing a recovery. While we were told the recession officially ended last year, recovery still seems a long way off. What began as a year of hope is ending full of questions that will have to be answered next year.

Equities are finishing strong and worry, due to the "flash crash," is less directional and more overall market confidence. It is hard to say where the market would be without the events of May 6 and, like the commodity sector, equities have been negatively correlated to the dollar, which seems to be driving all sectors. Adding to the uncertainty going into 2011 is not only what will happen with the dollar but when more traditional correlations will return.

"Hopefully, 2011 is going to answer some questions. How is quantitative easing working in the market? Is it well accepted?" Streible asks. "Is it solving all our problems? Is the credit crisis being relieved there? Will the economy continue to expand and will inflation 
move up?"

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