Michael Boutros and Christopher Vecchio provide currency market analysis: Which currencies to trade in 2012.

The British Pound, the euro, and the Swiss Franc had an underwhelming performance in the second half of 2011. In fact, while the commodity currency block – the Australian Dollar, the Canadian Dollar, and the New Zealand Dollar – depreciated by 5.82 per cent in the second half of the year, the European currencies have fallen 7.17 per cent against the US Dollar (figure 1). The broad outperformance of the US Dollar reflects the shifting dynamics of the macroeconomic picture: weaker Asian and European growth and stronger North American growth. Given recent data, this trend is expected to continue, with the global slowdown likely to be exacerbated by the eurozone debt crisis.

What happened in the second half of 2011?
The economic situation of Europe in the second half of 2011 indicates very clearly why the European currencies are likely to continue to fall in 2012. The fundamental outlook is deteriorating rapidly. In early July, Greek issues flared, and questions regarding Greece’s ability to pay back its debt surfaced. As expected, this led the European Troika – the European Commission, the European Central Bank, and the International Monetary Fund – to come in and offer funds to the embattled peripheral EU state.

By 4 October, global equity markets were trading near or at their yearly lows again. The first week of October marked the beginning of a three-week lull in the crisis. By the end of the week, eurozone finance ministers had agreed to a reworked deal on collateral for Greek loans. These measures met the demands of the Northern European countries, the funding members of the European Union. Consequently, eurozone leaders hinted at a new deal which would emerge at a late-October summit in Brussels, sparking a 7.69 per cent rally in the EUR/USD from 4 to 27 October...

Excerpted from an article originally published in the Jan/Feb 2012 issue of YourTradingEdge magazine UK. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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