Month: December 2011

The Central Bank of the Republic of Turkey kept its benchmark 1-week repo rate unchanged at 5.75%.  The Bank said: “The Committee has indicated that tight monetary policy should be maintained for a while in order to keep inflation outlook consistent with the medium term targets. However, given the prevailing uncertainties regarding global economy, it would be appropriate to preserve the flexibility of monetary policy. Therefore, the impact of the measures undertaken on credit, domestic demand, and inflation expectations will be monitored closely and the amount of Turkish lira funding via one-week repo auctions will be timely adjusted on either direction, if needed.”

The Turkish central bank last cut the benchmark rate by 50 basis points when it held an emergency meeting in early August, the bank also cut its benchmark interest rate by 25 basis points to 6.25% in January this year.  The Turkish central bank also adjusted required reserves in late July.  Turkey reported annual consumer price inflation of 7.7% in October, compared to 6.7% in August, 6.3% in July, 6.2% in June, 7.2% in May, 4.26% in April, and 3.99% in March, and above the Bank’s full year inflation target of 5.5%.  

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part II of the series. You can read Part I here. Check back in a few days to read Part III, or you can download your free copy of the Independent Investor eBook here.

Action and Reaction
In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” The news headlines in Figure 1, for example, reflect what economists tell reporters: Good economic news makes the stock market go up; bad economic news makes it go down. But is it true?

Figure 2 shows the Dow Jones Industrial Average and the quarter-by-quarter performance of the U.S. economy. Much of the time, the trends are allied, but if physics reigned in this realm, they would always be allied. They aren’t. The fourth quarter of 1987 saw the strongest GDP quarter in a 15-year span (from 1984 through 1999). That was also the biggest down quarter in stock prices for the entire period. Action in the economy did not produce reaction in stocks. The four-year period from March 1976 to March 1980 had not a single down quarter of GDP and included the biggest single positive quarter for 20 years on either side. Yet the DJIA lost 25 percent of its value during that period. Had you known the economic figures in advance and believed that financial laws are the same as physical laws, you would have bought stocks in both cases. You would have lost a lot of money.

Figure 3 shows the S&P against quarterly earnings in 1973-1974. Did action in earnings produce reaction in the stock market? Not unless you consider rising earnings bad news. While earning rose persistently in 1973-1974, the stock market had its biggest decline in over 40 years.

Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold? Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.

Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it. (I was generous in ending the study now rather than in 2001, at which time gold had lost over two-thirds of its value.)

It does no good to say — as we sometimes hear from those attempting to rescue the physics paradigm in finance — that gold will follow the money supply “eventually.” In physics, billiard balls on an endless plane do not eventually return to a straight path after wandering all over the place, including in the reverse direction from the way they are hit. (What physics-minded investor, moreover, can be sure that gold should follow the money supply rather than vice versa? Is he certain which element in the picture should be presumed to be the action and which the reaction? Maybe a higher gold price increases the value of central banks’ gold reserves, letting them support more lending. Cause and effect arguments are highly manipulable when using the physics paradigm.)

We do know one thing: Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades, lost even more buying power because the dollar itself was losing value against goods and services, and lost even more wealth in the form of missed opportunities in other markets. Gold’s bear market produced more than a 90 percent loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation! How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong.

Learn to Think Independently — Download Your Free Independent Investor eBook “The Stock Market is Not Physics” is just one report in the more than 100 page, two-volume Independent Investor eBook. You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market. Download Your Free eBook Now.

By MoneyMorning.com.au

There are two questions that have befuddled investors for years.

When is the best time to buy stocks?

And, when is the best time to sell stocks?

Neither question has ever been – and probably never will be – finally answered.

The reason these questions will stay unanswered is that there’s no single “best time” to buy and sell stocks.

When you’re dealing with speculative stocks that’s where the art of stock speculation comes into play.

Because at any point in time, a stock is a buy or a sell. It’s just a question of the size of the return you expect. Let’s explain it this way using a homemade chart we published in the January 2011 issue of Australian Small-Cap Investigator.

We call it the…

Simply put, all stocks, but especially small-cap stocks go through a series of ups and downs. But contrary to what some people think, these price moves aren’t random. They are affected by investor hopes for a stock.

For instance, an investor who buys a speculative stock early while it’s still trading for 3 cents per share (point 1 on the chart), has a different attitude to a new investor who paid 50 cents per share (point 2 on the chart).

If the share price stays at 50 cents the second investor will break even. If it goes to 60 cents, the investor will make a 20% gain. On the other hand, the first investor has made a 1,566% gain at 50 cents, but could turn it into a 1,900% gain if it goes to 60 cents.

The point is, which investor is more likely to sell first if the share price doesn’t go up? The first or second investor? The truth is, we don’t know. Individual investors think for themselves, so there’s no way of knowing exactly who would do what.

But what we do know is that when the investor outlook changes, speculative stocks will fall.

Until they reach a point where investors are prepared to buy (point 3 on the chart). Because now those investors still believe the stock will go to 60 cents. But instead of paying 50 cents for a 20% return they’re now able to pay – say – 10 cents for a 500% return.

The thing is, nothing about the company has changed. All that’s changed is investor sentiment. They won’t now pay 50 cents for a stock worth 60 cents, but they will pay 10 cents.

Early, Late and Next Stage Investors of Speculative Stocks

It was a stock tipped in Australian Small-Cap Investigator as long ago as 2008. You can see how the small-cap effect has worked on Lynas over the past five years:

The numbers on the chart aren’t anything to do with technical analysis. We’re simply using these numbers as reference points to explain the small-cap effect… where at Point 1 you get early investors. At Point 2 in come the late investors. And at Point 3 you get the next stage Investors as speculators figure out if the price is cheap or still too expensive.

During that time, Lynas Corp has traded as low as 10 cents… and as high as $2.70. Today it’s trading for $1.15. Yet over the five years, what’s changed?

It’s still a rare earths company. It still has the same big hole in the ground today as it did three years ago. It’s still trying to get approval for a processing plant in Malaysia. And it’s still trying to make a buck by busting the Chinese stranglehold for rare earths.

OK, it has built the Malaysian processing plant… but it’s now held up due to potential environmental delays. And another thing to change is the rare earths price which has gained 663% in three years… although the price has dropped 42% from this peak in just the past two months.

But aside from that, the main thing that changes is investor attitudes. Punters may have thought the Lynas share price would go higher in 2011, but they didn’t want to pay $2.70 for the privilege of owning it.

So today it’s back to $1.15 and the price is levelling off. This is where punters start figuring out if the stock is cheap or whether it’s still expensive.

However, there’s one other thing to note. Lynas is no more profitable today than it was in 2009. But that didn’t stop the share price gaining 2,600% in two years.

The Art of Stock Speculation

That’s the real art of small-cap stock speculation. You don’t have to wait around until the company makes money. In fact, you could argue that’s the last thing you want to do.

Because by the time it gets to the real money-making stage, most of the risk of investing in the company has gone. That’s when the company becomes a safe blue-chip, perhaps even paying out a dividend.

If you want to make the big returns, the best time to get in is early on (points 1 on the chart). This is when the speculative stock is at its most risky. But it’s also where you get the biggest returns.

Whether the company ever makes a dollar of profit while you own the stock is irrelevant. What you need to do is see the potential and get in early. It’s how we played the silver story in late 2009, getting in to a silver stock while the silver price was still low.

And it’s how we tipped natural gas stocks in 2008… and today we’re taking a similar approach. In the December issue of Australian Small-Cap Investigator we laid down the three sectors we believe are set for gains in 2012… and how subscribers can take part in these gains by using the strategy we’ve just shown you above to buy in at the right points.

It’s a high-risk strategy. But if we get it right the payoff will mean big triple-digit percentage gains.

If you’d like to find out more about it, click here…

Cheers.
Kris

P.S. The latest issue of Australian Small-Cap Investigator lays out my thoughts on where the market will head next year… and the three best sectors set to gain. To find out more, click here…

Related Articles

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The Only Gold and Silver Stocks to Buy

The Secret Aussie ‘Bank Run’ is a Sign to Buy Gold

Why Gold Should Become Your ‘Stay Rich’ Asset

From the Archives…

A More Profitable Investment Than Cheap Gold?
2011-12-16 – Aaron Tyrrell

The Best Property Investment in the World
2011-12-15 – Aaron Tyrrell

Is This the Gold Buying Dip You’ve Waited For?
2011-12-14 – Kris Sayce

Is Now a Good Time to Invest in Stocks?
2011-12-13 – Kris Sayce

Why You Shouldn’t Trust Your Gold to a Banker
2011-12-12 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Speculative Stocks and the Art of Stock Speculation

10 Electric Vehicle Trends to Watch in 2012

by David Fessler, Investment U Senior Analyst
Thursday, December 22, 2011

Yesterday, after nearly a year of waiting, I finally got to order my Nissan LEAF. It’s the first affordable, plug-in electric vehicle (PEV) available to the masses. The Chevy Volt, while touted as an EV, is really a plug-in hybrid electric vehicle (PHEV). It still has a gas tank, an engine and an exhaust system.

I should receive my LEAF next March or April. It’ll be the first one in my area, and one of the first in Pennsylvania.

In about a week or so, my “oil well” should be producing “oil” to fuel my LEAF. Translated, my 10-kilowatt (kW) solar panel array should be live, and connected to the grid.

The system has been finished for over two weeks, but I’m still not connected to the grid. My local power company is in no particular hurry to switch my service over and connect the panels.

I’m not surprised. Solar and wind power, and electric vehicles (EVs), have been less than enthusiastically received by the general public, and even less so by the electric utilities.

They have to manage the additional supply delivered by a solar field or wind generator. They also have the opposite problem when EV owners plug in their cars for charging.

Why all the kicking and screaming? In large part, it’s due to something called the human “normalcy bias.” The idea is that humans will keep doing something the same way, over and over, until they get hit on the side of the head with a two-by-four.

Buying and driving a gasoline-powered car is something most adults have done their entire lives. We know nothing else, nor have we even had a choice… until now.

I’m trying to avoid the two-by-four. You see, I think oil prices are headed up, and much faster than anyone realizes. When the oil price tipping point is reached, EVs will all of a sudden make all the sense in the world.

Many automobile companies are, rightly or wrongly, anticipating this tipping point. They’re in the midst of designing and introducing more and more EV models.

While Nissan beat all others to the punch with an affordable PEV (I’m excluding the $98,000-plus Tesla Roadster here), consumers will shortly have a wide variety of makes and models to choose from.

In 2012, Ford is coming out with the Focus EV all-electric. Toyota’s adding a plug to its popular Prius Hybrid. Tesla is working on a cheaper EV sedan, dubbed the Model S, and Volvo is introducing the all-electric V-70. There are more coming right behind them.

EVs for Dummies… and the Rest of Us

One of the biggest hurdles faced by EV manufacturers is educating the consumer, and it will be their focus in 2012, according to Pike Research, LLC. Few understand the difference between a PEV and a PHEV.

Maintenance costs for PEVs are drastically reduced when compared to an internal combustion engine (ICE)-powered vehicle. There are no oil changes. Brakes and rotors last over 100,000 miles. There’s no emissions testing, because there’s no tailpipe. PHEV owners still have to contend with all these things, since their cars still have ICEs.

In relatively short order, both China and Japan will zoom past the adoption of both EVs and vehicle-to-grid (V2G) technology. V2G gives EV owners the ability to allow utilities to use their battery pack as a source of energy when connected to its charging station.

10 EV Trends to Watch in 2012

Pike Research LLC, the leading clean-tech market intelligence research organization, recently published a white paper entitled Electric Vehicles: Ten Predictions for 2012. It’s forecasting the global EV market to reach 250,000 vehicles worldwide next year.

Here’s a synopsis of their predictions:

#1 The global availability and increasing sales of EVs will put an end to the “Are they for real?” speculation.

Pike believes 2012 will be the transitional year for EVs, as more models become available, and even more are announced.

#2 Car sharing services will expand the market for EVs and hybrids.

Right now, at least 10 car-sharing services are offering EVs to rent. Car sharing appeals to younger, environmentally conscious urban dwellers. Avis and Hertz are the most recognizable names, and more are jumping on this hot trend all the time.

#3 Battery production will get ahead of vehicle production.

Numerous battery companies have factories geared up to produce more batteries than manufacturers can use. Delayed model launches and slow consumer acceptance will likely result in battery prices dropping faster than expected (good news). Some manufacturers are directing excess capacity towards the grid energy storage market, also in its nascent stages.

#4 Road tax legislation in the United States that will require PEV owner contributions will fail.

Right now, PEV owners who bypass the gas station won’t be paying any road use taxes, which are part of every gallon of gas purchased. A number of state bills that would force owners to pay a vehicle miles traveled (VMT) tax have died on the vine.

A yearly fee based on average miles driven will ultimately be the tax that will pass.

#5 The Asia-Pacific region will become the early leader in vehicle-to-grid (V2G).

Since EV penetration will be highest here before anywhere else, V2G will be implemented here first, and quickly dominate the market. The unreliability of the grid in this region will be greatly improved with the use of V2G technology.

#6 PEV prices will continue to disappoint many consumers.

Early adopters will pay more. The battery glut, if it shows up at all, won’t be reflected in EV prices before 2013 or 2014. Early adopters will pay for the huge investment that EV companies made in assembly lines and battery and motor technology.

Ultimately, we could see prices in the low $20,000 range, but that target is a few years out.

#7 Third-party EV charging companies will dominate public charging sales.

Grocery stores, drug stores and other commercial establishments looking to attract EV owners have two choices. They can purchase and maintain the charging equipment themselves, set the fee structure, or give the power away free in order to attract customers.

The alternative is to have a third party install and maintain it. Pike feels this will be the more attractive of the two. Wal-Mart, Icon Parking Group and Simon Property Group (large mall owner) are all opting for the third-party route.

#8 Germany, South Korea and Japan will see the most progress towards the commercialization of fuel cell vehicles (FCVs) in 2012.

According to Pike, 2015 marks the start of the commercial rollout of FCVs. But it won’t be here in the United States. The Department of Energy’s shift away from FCVs towards EVs leaves some uncertainty in their adoption here.

#9 Employers will begin to purchase EV chargers in large numbers.

Companies who want to attract young professionals with EVs will begin to install them in large numbers. Already Google, Adobe, SAP and others have installed dozens at their U.S. facilities. 2012 will see hundreds of other global companies following their lead.

Sales in North America could exceed 5,000 units, while the Asia Pacific region could hit 18,000, according to Pike’s report.

#10 EVs will begin to function as home appliances.

Pike reports that many automakers are adopting the HomePlug Green PHY communications standard. This will allow information about the EV to be passed over the power line to other smart-grid enabled devices, insuring they don’t all turn on at the same time.

In summary, 2012 looks to be a big transitional year for EVs worldwide. We’ll take a look next year and see how many of Pike’s predictions have come to pass.

From an investment standpoint, charging station manufacturers like AeroVironment, Inc. (Nasdaq: AVAV) are still the single best way to play the growing EV market. Their business should really start to accelerate in 2012.

Good Investing,

David Fessler

Article by Investment U

By The Sizemore Letter

With Europe’s politicians continuing to stumble from one summit to another without a realistic plan for resolving the sovereign debt crisis, the one European institution that is keeping the entire system afloat is the European Central Bank.  The ECB gave the capital markets a boost earlier this month when it announced that it would provide virtually unlimited liquidity to Europe’s ailing banks in the form of low-interest loans of up to three years.  Data released this week show that Europe’s banks have accepted the ECB’s offer with enthusiasm; 523 banks borrowed nearly half a trillion euros according to Reuters.

This was an enormous step forward, but a little perspective is necessary here.  The move more or less eliminates the risk of a disorderly default by a major bank—a “Lehman Brothers moment,” if you will.  But it most assuredly does nothing to assist Europe’s indebted countries, nor does it do anything to mitigate the risk that a sovereign default could turn the capital markets upside down.

French President Nicolas Sarkozy effectively showed the rest of the world his cards when he suggested that banks could borrow unlimited funds from the ECB under this arrangement and then use them to purchase the government bonds of their respective home countries.  In theory, this could work.  Spanish and Italian banks could be “lenders of last resort” to their cash-strapped government, stabilizing the bond markets and bringing yields back down to earth.

But if this is what Mr. Sarkozy is proposing as a “solution” to the debt crisis, I fear the French President may be in for a disappointment.

It was excessive purchasing of sovereign debt that got banks into this mess to begin with.  If government bonds were “risk free,” then buying them with cheaply borrowed money makes a lot of sense.  But as recent events have proven, European debt is anything but risk free.  What banker in his or her right mind would continue to throw good money after bad?  And how would this be in the best interests of their shareholders?

Meanwhile, European banks are already under enormous pressure to shrink their balance sheets, reduce their risky assets, and deleverage themselves…and to do this while simultaneously keeping the lifeblood of credit flowing to European companies and consumers.  Bank funds used to buy government bonds are bank funds that cannot be lent in the real economy.  And given that Europe may already technically be in recession, is this what Mr. Sarkozy wants?

And so the crisis rages on.

For banks—or any investors, for that matter—to be buyers of Italian and Spanish debt, they need to be confident that they will get their money back.  And for this to happen we need to see one of two developments, both of which are currently off the table:

1. A massive increase in direct buying of the troubled countries’ sovereign debt by the European Central Bank on a scale big enough to drive down interest rates.
2. Some sort of “Eurobond” scheme that shares liability across the Eurozone.

The proposed EU treaty changes that would enforce budgetary discipline would also do a fair bit to repair shattered confidence in the market, though even this alone is not sufficient without one or both of the options above.

Until Europe’s leaders accept what the markets are currently screaming at them, we can expect more months of on again, off again volatility.  Brace yourself; it’s going to be a wild ride.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

How Will Kim Jong-il’s Death Affect Global Markets?

by Jeannette Di Louie, Investment U Research
Monday, December 19, 2011

Kim Jong-il, North Korea’s “Dear Leader” – or crazed dictator, depending on whom you ask – died on Sunday, December 17. According to the official Korean Central News Agency, he suffered a heart attack due to all of the mental and physical stress he was under.

Of course, considering the state of the highly secretive nation of North Korea, we might never know whether that’s the truth or not. Even the country’s next door neighbor, South Korea, can only speculate that Kim may have had a stroke in 2008 and/or been diagnosed with cancer after that.

Global markets didn’t seem to really care how he died though; only that he did. On Monday, December 19, the first trading day after the news hit, Business Insider reported:

“European stock markets were mixed to lower on Monday, as investor confidence waned after the announcement of North-Korean leader Kim Jong-il’s death and amid ongoing concerns of mass downgrades in the Eurozone.”

More than likely, the health of the combined European economy weighed far more heavily on investor’s minds out of the two. But even so, everybody knows that most markets don’t like uncertainty, and can perform irrationally over the slightest hint of it at times.

And let’s face it: The previous North Korean regime, headed by Kim Jong-il, thrived on keeping the rest of the world as unsure as possible.

Now the world has to wonder whether his son will do the same.

Kim Jong-il Leaves All to Kim Jong-un

Kim Jong-un, the third son of Ki Jong-il, first came to global attention in 2009 when his father officially appointed him his successor. But while the world had practically three years to digest that information, we know nearly as little about him today as we did before his promotion.

And what little we do know about him isn’t very comforting…

The Younger Kim has lived his entire life in North Korea, surrounded by his father’s communist policies, which were enforced by his father’s unquestioned dictatorship. His worldview is therefore likely narrow and unyielding.

Worse yet, he has some seriously scary boots to fill if he wants to live up to his father’s (and there has been no indication that he doesn’t want to fill them). So focused on building up his country’s military might, Kim Jong-il not only bullied the United Nations and the international community repeatedly, but also impoverished his own people who are even now dying of malnutrition and starvation.

And the Markets Go on

As evidenced by the enormous rally global markets experienced on Tuesday, most investors don’t seem to care long term – or even mid term – about who’s leading North Korea.

And really, that’s still up for grabs.

Only 28 years old, Kim Jong-un isn’t the only member of his family with a claim to the throne. Both of his older brothers were once considered likely successors and his uncle by marriage, Chang Song-taek, might very well have been running the government for years now, just behind the scenes.

If Kim remains in power, it will likely be because his uncle can use him as a puppet or because he has cracked down heavily on dissenters. Neither bodes well for the rest of the world.

Yet for better or for worse, the world seems much more focused on the economic health of Europe and the United States. Everything else pales in comparison these days.

More than likely, North Korea and its new “Dear Leader” – or whatever title Kim Jong-un plans to take – will play the same game it has for years: develop its nuclear program, starve its people and make a sometimes painful nuisance out of itself in the international community.

But if it affects the markets in any large way going forward, it will only do so sporadically.

Good Investing,

Jeannette Di Louie

Article by Investment U

Dec. 22 (Bloomberg) — Bloomberg’s Zeb Eckert reports on the outlook for economic relations between North and South Korea after the death of Kim Jong Il. Eighty percent of South Korea’s 20 largest business groups are concerned Kim’s death will pose a risk to their business, the Herald Business reported Dec. 20, citing its survey of executives at the companies. Nine of them responded they will factor in the risk for their business plans for next year, according to the report. (Source: Bloomberg)

Currency traders look to many indicators in an attempt to form a view for future exchange rate movements. These usually include GDP and employment rates together with other factors providing feedback on the overall health of the economy. Traders pay particular attention, however, to interest rates as a change in a jurisdiction’s interest rate usually has a direct impact on exchange rates.

Typically, when interest rates go up, so too does demand for assets denominated in that currency. This increased demand usually leads to a gain in the value of the currency. Conversely, a decrease in interest rates often leads to a currency sell-off and may force a devaluation in the currency.

The correlation between interest rates and exchange rates is well established and if it appears likely an interest rate change is imminent, currency traders are bound to consider the potential impact on currency rates. So, with that in mind, here is a look at possible exchange rate actions for several of the major currencies:

The U.S. economy improved in the second half of 2011 but the Eurozone debt crisis poses a risk to the global economy.

The U.S. economy realized positive growth in each of the first three quarters of 2011. Employment also made respectable gains with the unemployment rate falling to 8.6 percent in November compared to 9.2 percent unemployment in July.

While modest, these improvements have led to a sense of optimism but leave it to Fed Chairman Ben Bernanke to maintain perspective. In late September, Bernanke referred to unemployment as a “national crisis” and continues to warn that unemployment will remain “elevated” for at least another year.

In addition, Bernanke has highlighted the European debt situation as a threat that could very quickly reverse the recent gains. In mid-December, Bernanke met with a group of Senators and used the opportunity to warn that the Eurozone situation will likely deteriorate in 2012 and the repercussions will certainly be felt in the U.S.

Given the Chairman’s stance and his earlier pledge to maintain the current record-low interest well into 2013, there is little reason to expect a change in the Federal Funds rate for 2012.

The European debt crisis is spreading well beyond Greece and is now threatening the larger economies.

As 2011 draws to a close, the outlook for the Eurozone has taken a dramatic turn for the worse. The debt contagion has undoubtedly spread beyond Greece with Ireland, Portugal, Spain, Italy, and even France – the region’s second-largest economy – now at risk. At the very least, some painful remedies will be necessary to address sovereign debt levels, the implementation of which will contribute further to the deterioration of several European economies.

In addition, the European Central Bank introduced back-to-back interest rate cuts late in the year to lower the benchmark rate to 1 percent. During the same time period, the European Commission reduced its growth outlook for the year, lowering growth projections for 2012 from 1.8 percent growth, to just 0.5 percent – and some people feel that even this revision is too optimistic. Unemployment is also expected to rise as government spending cuts kick in and  several European countries find themselves with no choice but to slash expenditures to reign-in deficits.

Given these challenges, it is difficult to see how the ECB can entertain serious thoughts of a rate increase until conditions improve. If anything, the chance of an additional rate cut early in the new year seems far more probable.

The Bank of England slashes the 2012 outlook ahead of wide-spread government spending cuts.

While not officially part of the Eurozone, Great Britain’s future is very much tied to the fate of those countries sharing the euro. Like the Eurozone, Great Britain faces a staggering debt accumulated from years of deficits and now has no option but to sharply reduce total government spending.

A considerable portion of these spending cuts will come in the form of government job losses that will push the unemployment rate considerably higher during the course of 2012. This will lead to a further pullback in spending causing growth to slow more than originally anticipated. As a result, the Bank of England has reduced its growth outlook for 2012 to 1 percent growth, from 2 percent estimated earlier.

Bank of England Governor Mervyn King defended the revised outlook suggesting that without the Bank’s efforts to stimulate the economy through low interest rates and a bond purchase program to inject cash into the economy, the decline would be even worse. Given this, it seems unlikely we will see an interest rate increase until the economy shows considerable improvement.

Increased competition from other Asian countries and a strong yen places Japan’s export sector at risk.

Japan’s economy is tied directly to exports. Initially, Japan grew to dominance by providing a low-cost manufacturing center but as the country’s expertise expanded and the workforce became more skilled, the cost advantage diminished over time. In more recent years, China and other Asian countries have become direct competitors to Japan.

Japan’s export business also benefitted from a favorable exchange rate with other currencies, particularly, the U.S. dollar. By the late 1970s, the U.S. accounted for an ever-greater share of Japan’s export market eventually becoming Japan’s largest export destination until being recently surpassed by China. Still, the U.S. bought just under $100 billion worth of goods in 2009 but future sales could be impacted as the yen continues to gain on the dollar.

In mid-2010, one U.S. dollar could buy just under 94 yen but the dollar has weakened considerably since then and as of late December, one dollar was worth only about 77 yen. This represents a loss of roughly 22 percent in the space of six months thereby making Japan’s products significantly more expensive for U.S. consumers.

For these reasons, it is very unlikely that the Bank of Japan will raise rates thereby risking further appreciation of the yen. In fact, during the second half of 2011, the Bank engaged in the selling of hundreds of billion of yen in an attempt to over-supply the financial system and reduce the value of the yen.

Weaker demand for Canadian exports eases the need for an interest rate hike.

At one point during 2011, the Canadian economy was growing well in excess of the Bank of Canada’s 2 percent annual growth rate target. Bank of Canada Governor Mark Carney even went on record suggesting that easy access to cheap credit was to blame for both the inflation creeping into the economy and the increased level of debt held by Canadian households.

It certainly seemed that with these comments, Carney was prepping markets for an increase in interest rates, but it was not to be. By the beginning of the 4^th quarter, it was obvious to all that growth was declining and is expected to shrink further as the debt crisis in Europe becomes more of a factor in 2012.

Responding to the new reality, the Bank of Canada has cut growth projection for 2012 from 2.6 percent growth to 1.9 percent. Note that this is just shy of the top end of the Bank’s target which makes the need for a rate hike less urgent. If growth does expand more than expected in 2012, a rate increase is likely but this could be several months in the making and is not an immediate concern heading into 2012.

Further rate cuts could be coming early in 2012 if Australia’s export sales continue to decline.

While most other jurisdictions were cutting interest rates down to record lows and then holding them there, Australia was doing the opposite. For the first three quarters of the year, the benchmark rate was maintained at 4.75 percent but two quick quarter-point deductions in October and December reduced the bank rate to 4.25 percent.

These moves by the Reserve Bank of Australia were preemptive in nature as it became obvious that Australia would not be able to remain immune to global forces. Weaker demand for resources in Europe and most especially China, resulted in a considerable loss of sales and this is expected to become even more of an issue in 2012.

The RBA has already hinted that further rate cuts could be coming in the early part of 2012.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog.

Dec. 22 (Bloomberg) — Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, talks about the U.S. economy, Treasuries and stock market. He speaks with John Dawson on Bloomberg Television’s “First Up.” (Source: Bloomberg)