So who is going to drive financial markets around the world over the next three months? I’ll tell you who: governments and central banks. Rather than the usual markets drivers, it will be the decisions of governments and central banks that drive stock markets, currency markets, bond markets and commodity markets.

Spain is broke, China is slowing and the Australian economy outside the mining sector is struggling. As a professional currency trader there is only one thing that gives me any hope of making money on a quarterly basis, and that is to know what’s likely to be coming. I can’t look in the mirror as Wayne Swan does and tell people how great it was that we have GDP of 1.3 percent in the first quarter. That doesn’t help me make good investment decisions and I think you’ll agree it won’t help you either. You want to know what’s coming and that’s what I will be aiming to share with you.

Right now Europe is causing political and financial risk for the entire world however there is an event later this year that has not hit the headlines yet that I want to share with you today.

The USA has a looming 500 billion dollar fiscal cliff to avoid at the end of this year, a cliff that the world could potentially also be dragged over. To date you will have heard little about the automatic tax increases and spending cuts that are looming in the USA that could damage US GDP by around 3.8 percent, when its current GDP is under stress at just under two percent. This is a potential $500 billion damage bill that you’ll hear a lot more about in the months to come, and that threatens to take the US quickly back into recession. The greater market is yet to be alerted to the massive problems this could generate. I believe they will get nervous and markets will react negatively. If Europe and China are still damaging world growth, this could drive things substantially lower. The “fiscal cliff”, aptly named by Ben Bernanke some months ago, means that massive spending cuts and automatic tax increases will trigger if the US Congress doesn’t come to a deficit-reduction agreement before the end of the year.

What we are likely to see as time goes by this year is a series of ‘can kicking contests’ all the way to the US election at the end of the year. And a last minute deal to avert the crisis.

Neither Obama nor Romney will want to touch it, as any mention of it now could derail their election chances. Obama will however get involved at the last minute and will likely pull off an agreement just prior to polling day and try and use it as an election vote winner. That’s my take on it right now. Time of course will tell.

Romney will be stuck between a rock and a hard place, because if he doesn’t support Obama’s bid to get a deficit agreement he will be blamed for ignoring a genuine “fiscal cliff” that would send the largest economy in the world back into recession.

In a nutshell, President Bush brought in massive tax cuts that expire at the end of this year, the same time that Congress is also to deliver a deficit reduction agreement. The bottom line is, the consumers will be hit with higher taxes at a time when the US is desperate for growth and the government will, by law (which Obama cannot veto, it’s already done), need to cut spending across the board by four percent to five percent. Doesn’t sound like much, but trust me it’s huge!

The US is right now growing at 1.9 percent (Australia at 3.4 percent and Europe zero percent). But here’s an interesting stat that Romney will likely ram home in the final months of the US election campaign: The facts are that after four years in office there are only 100,000 more Americans working than when Obama took office in the depths of the financial crisis. And worse still there are 700,000 more counted as unemployed.

So what to do? Remember, markets don’t like uncertainty and the problem the US is facing will potentially cause uncertainty at some point later this year. This will cause a sell off and then a relief rally when the US get their act together at the last minute.

I will continue to remind you that markets usually swing, BIG, two or three times a year. There will be swings both ways for the balance of 2012 and into 2013 and the overwhelming bad fundamental position many countries are in will create a fantastic opportunity to profit.

Please remember one thing: The truth in fundamentals always comes home to roost. If you are wondering what I mean by that phrase I have an exercise for you. Start paying all your bills with your credit card and only take cash advances for the next 12 months. When you get the credit card bills, pay them only with cash advances from other credit cards you have. And when the limits are full on all the cards you have, apply for more credit cards and keep going. Eventually if you do this you will get the drift: the truth in fundamentals always comes home to roost, but sadly you will most likely go broke doing it. So if you don’t get my drift already, I suggest you do not ever trade currencies.

Europe continues to face economic uncertainty as peripheral countries such as Greece and Spain fall further into debt.

Governments are facing public backlash at policies that have been cutting public spending. Severely raising taxes are also yielding no solutions to the continued debt, according to the World Risk Developments newsletter.

The newsletter, released by the Australian Government’s export credit agency EFIC, outlines the possibility of Spain requesting an official bailout, and increased unemployment in the area leading to political discontentment.

EFIC chief economist Roger Donnelly said that banks in the region continue to struggle, and that fiscal solvency is getting worse.

“The troubled periphery of the area has been cutting public spending and raising tax rates – severely. And the European Central Bank has extended €1 trillion in cheap three-year loans to banks throughout the zone. Yet GDP continues to stagnate or slump,” Donnelly said.

“Banks continue to struggle; and public debt/GDP ratios in all the troubled peripheral countries continue to rise, showing fiscal solvency is getting worse, not better,” he added.

Donnelly said that unemployment throughout Europe has increased which is adding to political discontentment.

“Unemployment throughout the euro area is now at 11 percent, and youth unemployment is around 50 percent in both Greece and Spain. Not surprisingly, voters are angry and casting around for new politicians with new solutions,” Donnelly said.

The newsletter also details other problems that Australian exporters are facing internationally such as the high dollar, and competing with cheap Asian imports.

Commenting on the implications for Australian exporters Donnelly said, “Thankfully the direct trade shock from such a setback would be small overall, because Australia doesn’t export much to the euro area.

“It’s the roundabout effects that are more worrisome. The euro area is China’s number one export market and China is Australia’s number one export market. So the lower euro area demand for Chinese exports  could translate into lower Chinese demand for Australian commodities. Fortunately, China has some capacity to stimulate domestic demand in order to moderate  a euro area export shock, and this should mute any impact on Chinese demand for Australian exports.

“More serious effects could come through financial market channels. First, the availability of trade finance could deteriorate. Remember, European banks are reportedly responsible for 80 percent of trade finance worldwide. If they come under even greater pressure than they are currently to shrink their balance sheets, they will also restrict their extension of trade finance. Second, credit more generally could be squeezed. This is because Australian banks are heavily reliant on wholesale offshore funding markets, and any squeeze on these markets will increase the cost of funding, which the Australian banks will want to pass on to their customers, including their business customers.

“If worse comes to worst, the euro area problems could cause another world financial crisis and recession. In that event, both Australia’s commodity prices and the A$ would probably gap downwards significantly à la the aftermath of the Lehman’s bankruptcy in 2008. Australian exporters would face a lower dollar which is good but world trade would be shrinking which of course would have a negative impact.”