At the end of 2010, the research team of DailyFX – a popular forex news and analysis website – published their forecast for the year of 2011.

Below are their specific recommendations and how they have fared so far in the first quarter of 2011:

EUR/USD – sell, -6 percent

EUR/CHF – sell, - 4 percent

GBP/USD – sell, -3 percent

USD/CAD – buy, - 2 percent

AUD/USD – sell, - 1 percent

NZD/USD – sell, +2 percent

USD/JPY – buy, +2 percent

EUR/AUD – buy, +5 percent

DailyFX had two major themes: the continuing debt woes of Europe and a risk-off environment – or in strategist John Kicklighter’s words, a “collapse of government-sponsored risk appetite.”

Their recommendations, therefore, centered on the reverse carry trade (shorting high-yielding currencies against low-yielding currencies) and shorting European currencies against the US dollar.

So far, in the first quarter of 2011, they have been very wrong.

The dominant theme in 2011 has been interest rate expectations, or more specifically, the hawkishness of European central banks. Moreover, risk appetite is well and alive, despite the Middle East unrest and Japans’ earthquake, two events that no one saw coming.

In fact, were it not for these two events, DailyFX’s recommendations would have performed even worse.

Of the eight recommendations made by DailyFX, only three of them are profitable in the first quarter of 2011.

In the New Zealand dollar’s case, DailyFX recommended it as a part of the reverse carry trade theme. However, the reason for the NZD’s underperformance was the Christchurch earthquake, so the NZD/USD sell recommendation only worked out because of the unexpected misfortune of New Zealand.

The profitable buy USD/JPY and buy EUR/AUD analyses were legitimate, although the buy EUR/AUD recommendation was largely based on AUD weakness rather than EUR strength – when in reality the performance of EUR/AUD has been driven by EUR strength.

Of course, DailyFX’s recommendations are for the whole year, so they may be vindicated come December 2011. However, so far, they’ve been very wrong.

In December 2010, their analyses sounded very reasonable; after all, the European debt crisis wasn’t solved and arguing that the world economy depended on government stimulus was not far-fetched – in mid-2010, government sponsored risk-appetite did actually collapse.

But the first quarter of 2011 is turning out very differently and DailyFX’s reasonable assumptions in December 2010 simply haven’t panned out.

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