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US Dollar Projected to Outperform in 2012

US Dollar Projected to Outperform in 2012

2011-12-30 11:55:00
Joel Kruger, Technical Strategist
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  • Euro set for yearly close below 1.3000
  • EUR/JPY breaks to multi-year lows below 100.00
  • Looking for additional Euro declines towards 1.2000 in 2012
  • US Dollar see as most attractive currency in 2012
  • Australian Dollar could be even more exposed then Euro going forward
  • Third phase of global crisis expected to hit China

The Euro looks poised to close out the year below 1.3000 after dropping to a fresh 2011 low by 1.2858 on Thursday. The bearish close is rather appropriate in the grand scheme of things considering the Eurozone crisis was at the center of all things troubled in 2011. Although most market participants were watching the EUR/USD break, the Euro was pressured against many of the other major currencies in the final sessions of the year, with critical support in EUR/JPY broken on Friday after the cross took out major psychological barriers at 100.00 to trade to fresh multi-year lows.

From here, we would expect to see Euro declines accelerate into 2012, particularly against the US Dollar, with a measured move objective coming in somewhere near the 1.2000 area. Broadly speaking, we anticipate across the board US Dollar bids against all major and minor currencies, with the US Dollar seen as the most attractive currency in 2012 on both its safe haven appeal and the prospects for a sustained economic recovery in the United States.

We also project relative underperformance even against the Euro in the China correlated commodity bloc and emerging market currencies, on the expectation that a third phase of the global recession will soon fully reveal itself in China into 2012. We think this will be the next big shoe to drop, and we therefore warn against long positions, specifically in the Australian Dollar which we contend is highly overvalued and quite exposed at current levels.

Looking Ahead to 2012 - Foreign Investment in US Equities

While on the surface, the recommendation appears to be non-currency specific, we view this as an extremely attractive opportunity for a portfolio hedge in 2012 and potential arbitrage strategy. Currencies have been broadly outperforming against the US Dollar in recent years and it finally appears as though this trend could be on the verge of some form of a reversal back in favor of the buck. However, long USD positions have also been quite risky and exposure to the Greenback might bring with it some unwelcome stress. As such, our recommendation is foreign investment in US equities. What does this mean?

Here is how we see this playing out. Should current correlations stand, if US equities are to head higher, then the investor will benefit from the US equity return, but at the same time, likely have his/her investment offset by the sell-off in the US Dollar and appreciation in his/her local currency on the resurgence in risk appetite and outflow from the safe-haven US Dollar. If on the other hand US equities head lower, then the risk off market environment will allow the investor to offset his/her loss in US stocks through the appreciation in the US Dollar on its safe-haven flows (remember – the investor in invested in US equities and thereby has USD exposure).

So if this is the case, then where is the benefit in this trade, and why even do it? Well, what if we see a break down in familiar correlations where the US equity market rallies and the US Dollar also rallies at the same time? What if we see a situation where US equities and the US Dollar become positively correlated? In this scenario, the investor stands to benefit a great deal and will not only make money from his investment in US equities, but will also enhance his/her returns on the appreciation in the US Dollar.

The global recession appears to be moving in phases, and with the markets now dealing with phase two of the crisis in Europe, we can start to anticipate the transition to phase three, where we believe that China, the commodity bloc economies and emerging markets will all be exposed. At the same time, we see a first in and first out type of situation, with the US economy the first to emerge from the global recession which should translate into a more upbeat outlook on low valuation US equities and the US Dollar as well, on a narrowing of yield differentials back in favor of the Greenback as the Fed begins to signal a reversal of ultra accommodative monetary policy.

Relative performance versus the USD on Friday (as of 10:00GMT)

  1. JPY +0.31%
  2. AUD +0.29%
  3. ND +0.22%
  4. GBP +0.09%
  5. CHF +0.07%
  6. CAD -0.06%
  7. EUR -0.12%

TECHNICAL OUTLOOK

US_Dollar_Projected_to_Outperform_in_12_body_eur.png, US Dollar Projected to Outperform in 2012

EUR/USD: The market is now looking to establish below the critical 2011 lows from January 2011 at 1.2870 and a weekly close below this level will open the door for the next major downside extension towards the 1.2500 area. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped above 1.3500.

US_Dollar_Projected_to_Outperform_in_12_body_jpy2.png, US Dollar Projected to Outperform in 2012

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

US_Dollar_Projected_to_Outperform_in_12_body_gbp2.png, US Dollar Projected to Outperform in 2012

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5400 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

US_Dollar_Projected_to_Outperform_in_12_body_swiss1.png, US Dollar Projected to Outperform in 2012

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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