While some progress on European sovereign debt problems may have slowed or halted the decline of the euro for now, uncertainty on a fundamental level predominates in currency markets, leaving traders and technical factors in control and possibly less volatility in the outlook.
The dollar recently has seen some signs of strengthening while the yen has resumed weakening as central banks in the United States and Japan have taken different tacks on quantitative easing and currency traders and analysts are looking for more of those trends in the coming year.
Among factors affecting currency prices are recent crude oil price spikes as well as hard assets, which weigh particularly on the “commodity currencies,” such as the Canadian and Australian dollars.
Mark Frey, vice president of corporate payment and risk solutions for Cambridge Mercantile Group, says that following the Greek bailout deal many currency market participants believed the rebounding euro would challenge the $1.35 mark, but when that failed in the wake of the European Central Bank’s long term refinancing operation, thinking on the euro changed.
“The market is going to be able to focus a little bit more on the euro fundamentals,” he says. “The euro fundamentals at this time are obviously not that robust. We’ve got some significant concerns from an employment point, from a GDP contraction standpoint. As the various austerity measures get pushed through across Western Europe, it’s going to have a more negative impact on the overall euro and the economy.”
This is likely to lead to more economic contraction in Europe with the euro again heading downward. “It’s no secret that 2012 is going to be a difficult year for the Eurozone with austerity measures going into place,” says Greg Michalowski, vice president and chief currency analyst with FXDD. He notes that continued problems with the smaller European countries like Greece, Spain and Portugal are weighing on growth prospects of the Eurozone and that currency markets have that idea priced in.