Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Our European partners have to understand that opting for recession can't go on. The euro is too strong.”

- Arnaud Montebourg, French Industry Minister

With the Euro trading versus the United States Dollar around this year’s high, European exporters may start to suffer from the strong single currency, posing a threat to region’s recovery. Furthermore, on November 7 the European Central Bank is gathering to decide whether to make any further adjustments to its policy or stay pat and see how effects of previous reductions are spreading through the economy. According to the majority of analysts, Mario Draghi will refrain from any additional stimulus measures. However, French Industry Minister Arnaud Montebourg said the ECB should lower the Euro’s exchange rate versus the greenback as such measure could help the French economy. According to their projections, a 10% in single currency’s value would add extra 1.2% to GDP, create 120,000 new jobs and cut the deficit by 12 billion euros. In addition to that a 20% depreciation, France will create 300,000 working places and deficit will reduces by 30%.

French economy gained momentum in the second quarter, expanding 0.5%, entering growth after a period of contraction for two consecutive quarters. Despite the ongoing recovery in the 17-nation bloc, the Bank of France downgraded its growth forecast for the third quarter, citing business mood indicators that stagnated in September. Currently, the central bank expects a 0.1% growth, down from 0.2% quarterly rate estimated on September 9.

USD

"Today's blistering jobs report has quickly reminded America that our economic problems are getting worse, despite talking point reassurances from Federal Reserve officials”

- Todd Schoenberger, managing partner at LandColt Capital

A 16-day long government shutdown is likely to cut about 0.6% from the fourth-quarter growth, suggesting the Federal Reserve will not introduce any tapering of its stimulus in the nearest future. Furthermore, the closely watched labour market is starting to send worrying sings as well. In September the world’s largest economy created just 148,000 jobs, following a 193,000 gain in August, and significantly below the median estimate of a 180,000 increase. The overall unemployment rate, however fell to 7.2%, the lowest since November 2008. The participation rate remained unchanged at 63.2%, matching the lowest since August 1978.

The report includes the pay period up to the 12th of the month, two weeks prior to the federal shutdown. It will take some time to confirm that political disputes would lead to a sharp pullback in business activity last month. Nonetheless, the report was highly anticipated, after a 18-day delay.

While the labour market was showing some improvement, with jobless claims constantly falling, the uncertainty stemming from Washington have become a serious headache for employers. Taking it into account, analysts believe the Fed will not wind back its $85 billion monthly bond-buying programme until March 2014.

GBP

"The recent pick up we've had in the economy should definitely help. We should start to see some of the softer revenues that we've had pick up.”

- Victoria Clarke, an economist at Investec Securities

British public sector net borrowing increased less than expected last month, suggesting the pace of government and public corporations spending slowed compared with how much they earn. On Tuesday, the Office for National Statistics said that net borrowing, excluding financial interventions, fell to 11.1 billion pounds in September, down from 12.1 recorded over the same period a year ago. Borrowing fell mostly due to higher income and corporation tax receipts, which advanced 13.1% and 16.1% consequently. Despite the improvement, the overall public sector net borrowing over this fiscal year to September surged to 44.5 billion, up from 34.6 posted in the prior year. The ONS also mentioned that there is currently a constantly increasing expenditure across the board, a figure which expected to be revised in the nearest future. The fact that the U.K. is now one of the fastest growing economies should help Chancellor of the Exchequer George Osborne to meet his budget targets. At the same time, the Office for Budget Responsibility, predict a shortfall of 120 billion pounds for this fiscal year, a figure equal to 7.5% of GDP.

Even though government spending is on a strong uptrend, George Osborne presented a spending review late in June, showing government's commitment to proceed with extensive fiscal cuts in 2015-2016 in order to push net borrowing back to more appropriate levels. Osborne also pledged that spending would be reduced by 11.5 billion during 2015-2016.

JPY

"A positive economic cycle is starting to work in the area we oversee, with gains in corporate earnings driving an improvement in employment and income conditions, which in turn is helping keep consumer spending solid”

- Atsushi Miyanoya, head of the Nagoya branch in central Aichi prefecture

A further sign of broadening economic amelioration in the world’s third largest economy is a decision made by the Bank of Japan to raise its assessment of all nine country’s regions, after seeing a solid improvement in domestic demand, investment in the housing sector and with signs of improvement in the labour market. This is the first time since April when the bank has raised its outlook of all the regions. During BoJ’s quarterly Sakura Report on the regional economies, all nine representatives cited ongoing improvement, with eight using the word “recovery” when assessing the current situation. This means that government measures are starting to spread from urban areas to the regional economies. Meanwhile, Shinzo Abe is planning to launch and head a new government panel to promote deregulation by establishing special economic zones, a part of his growth strategy.

Currently analysts are turning their attention to the BoJ’s policy meeting on October 31. And even though policymakers are likely to stay pat on monetary policy, the focus is on the three-year price and growth forecasts that all nine members will update. Furthermore, investors are closely monitoring a gauge of core consumer prices as any radical changes could trigger further changes in policy.

CHF

"The indicator adds to the evidence that the outlook for the Swiss economy is improving, and most institutes--including ourselves--forecast an acceleration of economic growth next year”

-Credit Suisse

Swiss stocks turned green for a fourth day in a row on Tuesday, extending their highest level since May, while the Swiss Franc is moving further away from the 1.20 cap. Another welcoming sign for Swiss policymakers came out with a release of trade balance for September posted by the Federal Statistical Office. The report showed shipments from the Alpine country soared due to one extra business day and on the back of stronger demand, especially from the Eurozone and United States for Swiss pharmaceuticals, machinery and plastics. Swiss trade surplus stood at 2.49 billion francs last month, up from a revised 1.86 billion a month earlier, outpacing analysts’ predictions for a 2.01 billion surplus. Exports total 16.9 billion over the corresponding period, up 5.3% on year in real terms, or 2.2% in nominal terms. Imports however stood at 14.4 billion, 0.9% lower in real terms and down 2.6% in nominal terms. Meanwhile, one of the key export products, watches, were highly popular overseas last month, as watch exports propelled 8.5% on the year.

EUR/CHF currency pair is currently trading around 1.235, more than 350 pips higher than the cap imposed by the SNB to prevent deflation and economic slowdown. As long as Swiss Franc is losing ground versus its major peers, Swiss manufacturers and exporters will continue benefitting, providing additional boost for the economy.