CMC on top of ECB's 2011 rate hike reversal

CMC Markets has topped this week's 12-month currency forecast rankings after accurately predicting a reversal of the European Central Bank's (ECB) rate hiking policy during 2011 would lead to a weakening of the euro against a stronger US dollar.

On March 18, 2011, with EUR/USD trading at 1.4130, strategists at CMC Markets forecast the pair would rise in the short term, but fall to 1.275 in 12 months' time. Although the spot rate was at 1.32 by March 19, according to data from Thomson Reuters, the direction of the forecast proved accurate.

"At the time, everyone accepted that the rate hikes the ECB was embarking on was the only reason the euro was going up and at some point, as in 2008, it would have to reverse them. We felt EUR/USD would go higher in the short term but would fall back over the next 12 months as the ECB was forced to row back on its hiking policy and cut rates back down again," says Michael Hewson, senior market analyst at CMC Markets in London.

"I remember writing at the time – don't raise rates," Hewson adds. "Inflation is a problem but higher rates are the last thing these economies need. It wasn't rocket science – you could see the effect it would have and it made the euro crisis worse, not better."

Hewson also didn't expect the US to embark on a third round of quantitative easing after the end of the second round in June 2011, leading to a strengthening of the dollar. Looking forward, he expects EUR/USD will fall to 1.20 over the next 12 months.

Inflation is a problem but higher rates are the last thing these economies need. It wasn't rocket science

Elsewhere, CMC Markets forecast USD/CHF would rise from 0.90 to 0.92 in 12 months' time, accurately reflecting the March 19 spot rate.

"There was a concern that the Swiss National Bank would not tolerate a stronger Swiss franc and that turned out to be the case. My latest forecast is we should see it move up towards parity – I expect the EUR/CHF floor to hold in the short to medium term, but I think USD/CHF will move up over the next 12 months," Hewson explains.

Looking at other G-10 currencies, Hewson believes the Australian dollar is significantly overvalued and could weaken over the course of this year. "There will be further rate cuts out of Australia over the coming months because of deteriorating economic data and a possible slowdown in China. I am not suggesting a hard landing, but demand out of China will diminish for Australian commodities and that will drive flows out of the Australian dollar."