Tough year seen for currency trading

This year will likely be a “difficult” trading year for currency investors as central banks across the globe rethink their intervention strategies, France-based investment bank Credit Agricole CIB said.

In a research dated January 3, the investment bank predicted the escalation of investor concerns over the reliability and even viability of some currencies whose values were state-controlled.

It added that ongoing currency wars, such as those in the form of government and central bank intervention, would likely escalate with “lines of defense” being redrawn this year.

While some nations will battle to maintain trade competitiveness by attempting to devalue their currencies, it said others would strive to curb an exodus of foreign investment by supporting the value of their currencies.

“This central bank activity will have significant implications on currency reserve balances and undoubtedly lead many investors to question the ability of some smaller central banks (in the absence of capital controls) to persist with such intervention strategies,” Credit Agricole CIB said.

“Predicting the aim of this investor policy scrutiny will be one of the key themes to currency trading profitability in 2012,” it said.

The bank projected that the US dollar would enhance its “privilege” as a reserve currency this year.

Forecasting a US dollar rise early in 2011, the research noted that many were surprised by the US dollar’s initial inability to capitalize upon growing financial concerns in Europe, as investors focused instead on the US Federal Reserve’s willingness to print money.

This privilege remains a key factor behind stronger US growth projections in 2012, it said.

“Thus by way of self-fulfilling positive feedback mechanism, the US dollar’s reserve status is likely to prove self-fulfilling in 2012, motivating continued US dollar demand irrespective of the potential for additional Fed QE (quantitative easing),” it said.

QE refers to the US Fed’s bond buyback program as a means to infuse liquidity into the system without having to further slash key interest rates, which are already at near-zero levels.

In the meantime, Credit Agricole said recession and fears of a possible breakup of the European Monetary Union would likely continue to weigh on the euro in the early stages of this year.

“Seemingly ill-equipped in 2011 to deal with the policy coordination problem presented before it, European officials have virtually ensured investor uncertainty regarding the future of Europe in 2012,” it said.