A Look at Currency Performance in 2012

Foreign exchange markets are the largest markets in terms of liquidity and size, with an average daily turnover of over $4 trillion. As the first quarter of 2012 has come to a close, it is interesting to see the performance of the major currencies during this period. Broadly speaking, seven major currency pairs are considered major, each having the USD traded against another major currency. These seven major currencies are: Australian dollar, Canadian dollar, New Zealand dollar, euro, Swiss franc, British pound and the Japanese yen. Their performance with respect to the USD can be seen below: It is interesting to note that only the yen has depreciated verses the USD, and this comes as a relief for Japanese exporters as the strengthening of the yen was a major cause of concern for the Japanese economy. It is also surprising to see that the franc appreciated verses the dollar, especially because of the commitment towards weakening the currency by the Swiss National Bank. The pound and even the euro (which did not fall below 1.300) managed to outperform the USD, which shows the resilience of this currency. All the high yielding currencies posted gains against the USD. Given the performance of major currencies in the first quarter, investors may wish to consider the outlook for Q2 according to the large international banks. According to these banks, the dollar currencies should trade at around their current price. This means to expect the AUD to trade at around 1.030, the CAD to trade at around 1.000 and NZD to trade at around 0.816 verses the USD respectively. On the other hand, the USD is expected to make strong comebacks against all the European currencies, namely the pound, euro and the franc. In other words, the banks believe that these currencies are currently overvalued. The projected EUR-USD rate is 1.280 (falling below the 1.300 mark) and weaker than its current price of 1.312, while the projected GBP-USD rate is 1.560, weaker than its current price of 1.588 and finally, the projected USD-CHF rate is 0.950, which is again weaker compared to the current price of 0.916. However, these projected rates must not be taken at face value, since these projects may or may not be true. For instance, the Q1 projections made by banks for these currencies were far from what actually happened. It is quite possible that these projections may come true and there may be a flight to safety with the USD appreciating against the European currencies. However, it is possible that there may be some good news pertaining to the European crisis which may actually strengthen these currencies.