• Foreign exchange market is expected to continue to be volatile in 2011;

• The euro will strengthen in the last quarter of the year.

The analysts of UniCredit have made the most precise predictions about the fluctuation of the foreign currency rates for the past three years, according to a ranking of Reuters. The participating banks are ranked as at the beginning of every month, when the institutions submit forecasts about the movement of the three most traded currencies: the euro, the US dollar and the Yen. The bank with the closest forecast is awarded 50 points for each foreign currency, the one with the second closest prediction gets 49 and so on. The maximum possible number of points, which a bank can gather, is 1,800.

Thus, in the 2008-2010 period UniCredit gathered a total of 3,276 points ranking first among a total of 20 other leaders on the foreign exchange markets.

2011 – Between debt problems and inflation

The foreign currency experts of UniCredit Bulbank expect that during the current year the volatility on the foreign exchange markets (the term “volatility” shows how close a variable comes to the average value in a specific time interval – BNB source) will remain high.

The leading tendencies that will influence the movement of the foreign exchange rates are the inflationary expectations and the debt problems of the Eurozone member states.

It is namely the grasp of the debt problems, in particular, the fears about Ireland and Portugal that caused the weakening of the single European currency from 1.34 to 1.2870 in the first days of the year. Thus, 2011 began with a strong US dollar as a result of the mounting tension from the spreading of the debt problems to other countries of the Eurozone as well. When everyone expected that this tendency would continue, the exchange rate of the euro against the US dollar was sharply reversed to reach the current levels of EUR 1.37/USD 1. According to the foreign currency experts of UniCredit Bulbank, the main reason for this change is the shifting of the investors’ focus (although maybe temporarily) from the debt problems to the high inflationary expectations, expressed by certain top bankers of the European Central Bank.

Currently, analysts and foreign exchange market players are focused on the inflationary expectations and the predictions as to which one of the big central banks – the European Central Bank, the Federal Reserve (Fed) or the Bank of England – would be the first to begin raising its base interest rate.

According to the UniCredit Bulbank analysts, the inflationary expectations, related mostly to an increase of prices of raw materials (such as oil and metals) and certain foods, would exert considerable influence on the central banks’ decision on when and how much to raise their interest rates.

So, the specific forecasts of UniCredit Bulbank are for EUR/USD exchange rate 1.41/1 in the last quarter of 2011 due to strengthening of the Interest Rate Differential in favour of the euro and the stated firm resolve for overcoming of the debt problems of certain countries on the periphery of the Eurozone.

Note: the stated opinions are commentaries and not recommendations for the purchase or sale of currencies.