Five Currency Pairs to Watch in 2012

Since the financial crisis of 2008, the action in forex markets has intensified significantly. Global uncertainty, combined with significant intervention on the part of central bankers, has driven relatively immense volatility in the currency markets. While the future is uncertain, given ongoing events, traders can gauge the broader outlook for a variety of currency pairs. So often, comments from central bankers and political figures have driven the trading in these currency pairs. Subscribers to

are alerted to these comments as they are made in real-time.

Perhaps the most interesting currency pair in 2012 will be what was perhaps the most interesting pair in 2011. Barring a major shift in the next week of trading, the EUR/USD will enter 2012 trading at roughly the same level it entered 2011. Still, ongoing events suggest that it may not be likely for the pair to stay near $1.30 for long. If the situation in the Eurozone deteriorates further, the euro could weaken against the dollar significantly as traders increasingly come to doubt the future of the currency. Inversely, if the situation comes to some form of a resolution, the pressure that drove the value of the euro down in the second half of the year could quickly reverse and send the currency trading back up.

As of now, the Chinese yuan is pegged directly to the dollar. Thus, on a daily basis, this pair hardly moves at all. Yet, somewhat ironically, the CNY/USD could see the most volatility of all in the New Year. US politicians on both sides of the aisle have intensified their criticism of China's currency policies in recent years. Presidential hopeful Mitt Romney has been one of the most vocal critics of China, and if he were to win the presidency in 2012, traders may anticipate that there would be more pressure than ever on China to weaken the peg. Of course, pressure is mounting the other way as well. China's economy has recently shown some signs of weakness. Chinese leaders, ever mindful to the dangers of civil unrest, could actually make the peg even stronger in an effort to keep the Chinese manufacturing machine going. At any rate, 2012 could see a major shift in the Chinese peg—vastly altering the value of the pair.

Japan's economy has been struggling for decades. As Japan is dependent upon its exports for economic growth, a strong yen is detrimental to the broader Japanese economy. Japan's yen saw significant strength in 2011. Although the Bank of Japan intervened a few times, the yen was largely resilient. Yet, as Japan's economy continues to muddle along, pressure could mount on the BoJ to take aggressive action. If this action comes, the USD/JPY could see a major move.

Earlier in the year, the franc saw massive strength against the euro. Traders may have been running to the franc to shield themselves from taking losses with their euro holdings. Then, the Swiss National Bank instituted a direct peg at 1.20. This halted the flow of capital into the franc and kept the pair trading at a nearly constant value. Still, can this peg be maintained? The SNB has a relatively small balance sheet. If conditions in the euro turn grim, the SNB may not have the firepower to fully defend their peg.

The UK's economy is struggling. Recently implemented austerity measures may lead to a recovery in the longer term, but thus far the economy has failed to improve. Given its debt load and conflicted relationship with the European Union, the UK's government could come under fire from the ratings agencies in 2012. France, widely speculated to be ripe for a downgrade in the near term, has made comments drawing attention to the UK's plight. If the UK receives a downgrade, it could weaken the pound against the dollar, sending GBP/USD trading lower.