Tadawul FX on trading in uncertain times

The relentless economic crisis and overshadowing doubts over the future of the euro are principal aspects currently affecting the strategic trading of forex


The euro celebrated its thirteenth birthday this year. The superstitious may say that this unlucky number may signify a bad year for the single currency; however, we can define tangible factors that are having an impact on the euro.

Originally launched on January 1 1999, the euro was an electronic currency until three years to the day, when it became legal tender. The euro has come a long way since then, with many EU countries adopting it over their old national currencies.

The anniversary of the euro passed without celebration this year. Critics say that because of the global downturn and growing debts, the single currency has been exposed as a weakness for eurozone member states that have had to endure restrictions placed on their national economic policies. Contrary to that, supporters of the euro argue that the economic state of the eurozone would have been much worse had it not been for the strength of the single currency.

These mixed feelings are also shared by countries that had been keen to join the eurozone.

Poland now says that the euro lost some of its appeal to them and they will not be replacing the national zloty with the euro by 2016. On the other hand, Bulgaria is as enthusiastic as ever over the prospect of joining the eurozone, with many local businesses already accepting payment in euros.

Once a symbol of promise, the single currency was introduced to bring EU member states closer and facilitate easier banking and travelling, though it has now become a symbol of division. Several eurozone governments have been brought down as a result of immense national debt and banking problems that have even sparked protests and riots due to cuts in salaries, jobs and pensions, compounded by strict austerity measures, particularly in Greece where troubles first began. This has had an impact on the value of the euro and its future prospects.

2011 saw the euro fall significantly against the dollar as investors shied away from the single currency whose future viability has now been cast in serious doubt as the financial crisis continues to grip the eurozone.

Late last year there were talks and speculation that some EU member states, namely Greece, may have to opt-out of the single currency. Some experts believed that such action would be best for the economies of other eurozone member states, as long as the process of transition was carefully controlled. Others feared a domino effect may be a potential risk of such action.

If the single currency was to collapse, and the eurozone member states returned to their old national currency, the economic consequences would be immense. The effects would be felt on a global scale. Economists predict that in weaker countries such as Greece, the old currency would rapidly be devalued as citizens transferred their assets to other countries. Inevitably, this would inflate the value of the currency in stronger countries, particularly Germany. In turn this would have a direct impact on their export industry, making them less competitive in international markets.

It is for fear of such consequences that EU member states are rallying together to take steps and impose radical austerity measures to safeguard the eurozone. Many billions of euros are being utilised to bail out struggling economies in the EU. The European Financial Stability Facility (EFSF) has been established to address the EU debt crisis. This is a special body that has been set up to provide financial assistance to eurozone states that have economic difficulties with the key objective of safeguarding financial stability in Europe.

‘Cloud of uncertainty’
News this year that Greece would secure a second bailout helped lift investor confidence which resulted in a boost to the euro. Further news that the German economy’s outlook was positive also added more confidence in the euro. Nevertheless the cloud of uncertainty still lingers as does the persisting fear that the financial crisis will spread to other eurozone countries.

Greece’s future in the eurozone is a key element in the speculation concerning the prospects and stability of the single currency. Greece can only secure its future in the eurozone by dramatically lowering its sovereign debt. Numerous steps have been taken to ease the debt burden on Greece, and yet there is still much scepticism over Greece’s ability to even pay off this reduced debt.

Certainly, it is only with economic stability that Greece can be confident of retaining its membership in the single currency and by doing so also bring stability on a much greater scale to the entire eurozone, providing of course that the economy of other vulnerable eurozone member states does not deteriorate further.

Only time will tell if the single currency weathers the storm that is the current financial crisis. In the meantime however, every positive or negative fluctuation in the market value of the euro creates an opportunity for traders to make profit. In 2012 traders will be watching the euro carefully as it is anticipated that within the course of the year it will either bring about further decline or sizeable growth. As all traders of currency pairs in forex know; the fundamental trading principle is that as the value of one currency rises, the other falls, and vice versa. Therein lies the opportunity to trade on market movements, using leverage to magnify potential profits.

Gold may also bring about trading opportunities as the precious metal is often a safe refuge for investors at times of economic uncertainty. Historically, the value of gold is affected directly by the value of the US dollar. As the dollar falls, gold rises, and vice versa. However we are now seeing the euro also having an impact on the value of gold. In February we have seen pessimism over the US dollar combine with optimism in the euro to spark further growth in gold and create new trading opportunities.

With a currencies market full of so much uncertainty and yet so much trading potential; now more than ever, it is important for traders to choose the right broker.

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