As the last of the mince pies get eaten and new holes made in an already overworked belt, it’s time to put the last quarter’s volatile trading period behind us and look forward to a prosperous New Year. When it comes to making the prosperous New Year a reality, then making the right investment decisions will of course be a priority. Whilst I suspect that we will see more of the same intraday volatility making trending difficult, 2012 should be dominated by a US presidential election, the global debt crisis and a slowing Chinese economy. Looking for where the yields are to be in 2012, I am looking beyond the safe havens of the Swiss Franc and the Japanese Yen. The USD will be the centre of attention for a lot of traders, and rightly so, but I see a potential good profit opportunity going short in the EUR/GBP pairing:
EUR/GBP since Sept 2011
Despite all the hope, belief and profit taking that have propped up the EUR over the last 12 months, patience is wearing decidedly thin amongst investors. The last summit held in Brussels this December failed to provide any sort of solution to the spreading debt crisis…again... and the next summit not happening until March; all the signs emanating out of the Eurozone suggest a stalled growth for 2012. Whilst many traders focus will be on the EUR/USD, for the returns I am viewing the EUR/GBP as having a good yield potential for 2012, especially with a delicate, low growth predicted for the US economy.
The last couple of weeks have seen more credit downgrades and more threats of credit downgrades for the 17 Eurozone members. The outlook for the UK economy isn’t all roses, after all, the UK deficit widened to a record £15.2bn in Q3, but overall the fundamentals are in place for a better recovery for the GBP than for the EUR, and certainly less risk. The UK economy rose by 0.6% in Q3, which in itself is not a significant increase, but in the context of Europe and the stricken EUR, the 0.6% (0.1% higher than expected) increase signifies a tentative move in the right direction.
Although there is plenty to suggest a contracting UK economy; the service sector which constitutes 66% of the economic activity in the UK fell by 0.7% in October, the biggest fall in 6 months; Confidence appears to slowly crawling back into the UK economy with the PMI (Purchasing Managers Index) increasing from 51.3 in October to 52.1 in November. Despite only modest growth predicted for the UK in 2012, the Bank of England’s quantitative easing policy is keeping interest rates at a record low and the cost of borrowing below 2% for the first time since the reign of Queen Victoria. The unresolved troubles in the Eurozone, where the cost of borrowing has increased at a much sharper rate than the UK, looks like forcing the ECB to resign itself to print off more money in an attempt to tackle the debt crisis. This in turn will force investors to move away EUR into the more appealing GBP, which is why going short in the EUR/GBP pair, is my tip for the New Year.