Fundamental Analysis
EUR
“If . . . I understand markets, they want to see some concrete action at some point and maybe before the end of the year”
- Fabrizio Saccomanni Italy's Economy and Finance Minister
The economy has emerged from the longest-ever recession, the Euro is trading around 1.35 against the Dollar, the situation in the 17-nation bloc seems to be finally improving. Despite record high unemployment and risks of deflation, many analysts are saying the worse is over. On Thursday the ECB is gathering to decide whether to cut the benchmark interest rate, to assure a long-term sustained recovery, or they should announce any other tools of stimulation, or simply remain in a “wait-and-see” mode. Despite obvious signs of improvement, politicians and policymakers all over Europe are starting to express their concerns over Euro’s high exchange rate. Hence, in October 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. Following these comments, Italian Finance Minister Fabrizio Saccomanni joined his colleague and called the ECB to cut its benchmark interest rate to ease risks the currency poses to the fragile economy. The Euro has advanced more than 2% this year so far, and at the end of October, the EUR/USD hit a two-year high. Most of decisions in Europe are made by unanimity, so each country has veto power, which, according to Italian Fin Min is not a very efficient. Though Saccomanni backs banking union, he also calls for sovereign bond issuance in the future as one of the part of economic and monetary union’s integration process. Hence, he suggests concrete actions are needed, instead of leaving investors with forward guidance.
USD
"It appears that activity held up pretty well despite the government shutdown”
- Ryan Wang, an economist at HSBC Securities USA Inc.
Service sector in the U.S. unexpectedly expanded in October, signalling that the biggest contributor to the nation’s economy is overcoming the political impasse, which partially shut down the federal government. The Institute for Supply Management's non-manufacturing index rose to 55.4 in October from a reading of 54.4 in September, with a figure above the 50-threshold indicating growth in the sector. Analysts, however, had expected the index to fall to 54.0 last month. The data also showed that employment at service providers increased last month, adding to sign that rising sales help business leaders look beyond the fiscal talks in Washington. The employment index rose to 56.2 last month following a decline to 52.7 in September from 57.0 in August. Other non-manufacturing sub-indexes stayed expansionary in October. The Labor Department will publish the delayed October employment report Friday. Analysts project subdued job growth of around 120,000, generated mostly by service providers. If the expectations are accurate, this would be the smallest job gain since July and well below the 185,000 monthly average of the past year.
Following the release of ISM Non-manufacturing PMI data, the greenback strengthened versus the Euro, with EUR/USD falling 0.47% to trade at 1.3451, while U.S. stock markets remained lower.
GBP
“The UK economic recovery moved up a gear again in October, with the PMIs indicating record growth of output and employment. The all-sector PMI hit an all-time high of 61.5 in October, up from 60.2 in September."
- Chris Williamson, chief economist at survey compilers Markit
The Pound soared against the Euro and U.S. Dollar after a fresh release of services PMI, showing activity accelerated at the fastest pace in 16 years last month, suggesting the U.K. is pulling away from the rest of Europe. The Sterling advanced 0.66% versus the shared currency to 0.8415, while the cable increased 0.50%. A report from Markit Economics showed a measure of activity in the key services sector, as it accounts about 78% of economic activity, increased to 62.5 in October from 60.3 a month earlier, outpacing analysts’ predictions for a 60.4 reading. Services sector was the largest upward mover of the country’s GDP in the third quarter, rising through the quarter by 0.7%. Moreover, the output is currently slightly above the pre-recession peak in Q1 2008.
All other pillars of the economy like manufacturing and construction sectors, posted solid growth as well, reflecting a pickup in economic growth. While the neighbouring Eurozone is still facing significant problems and struggling to gain the momentum, the U.K. outlook is getting brighter, prompting the Bank of England to raise its own growth outlook next week. On the back of solid fundamental data, the European Commission has also predicted a 2.2% growth for the U.K. in 2014, twice the pace of the Eurozone and significantly higher than Germany and France.
CHF
“The risk of less favorable global economic developments has decreased somewhat compared to the last quarter. Nevertheless, structural problems in Europe persist, which could cause new tensions on the markets.”
- Thomas Jordan, the Swiss National Bank President
Further evidence a cap on the Swiss Franc is still vital, occurred on Tuesday, as a report from the Swiss Federal Statistical Office showed that consumer prices fell both on a monthly and annual basis, putting more pressure on the Swiss National Bank to prevent deflation and risks of economic slowdown in the Alpine country. Consumer Price Index, which accounts a majority of overall inflation in the country, fell 0.1% on a seasonally adjusted base in October, confounding estimates for a 0.1% increase. On a yearly basis, the decline was even steeper, with CPI falling 0.3% last month, down from a 0.1% drop in September, and below analysts’ expectations for a 0.2% decline. Market reaction was immediate, as the Franc fell against the single currency and U.S. Dollar, reaching 1.2315 and 0.9132, respectively.
While some analysts believe that amid recent string of upbeat data, and signs of economic amelioration in the global economy, SNB’s cap may become increasingly unnecessary as domestic currency could start to lose ground versus the single currency. Nevertheless, the latest data is bolstering the case the recovery is still fragile and despite improvement in economic sentiment, domestic demand remains subdued.
AUD
"The easing in monetary policy that has already occurred since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet.”
- Glenn Stevens, RBA Governor
It was not a surprise that the Reserve Bank of Australia maintained its loose policy stance on Tuesday, keeping the benchmark interest rate at a half-century low of 2.5%, in a bid to revive the resource-rich economy from tis post-mining-boom woes. The decision was widely tipped by analysts, given the latest improvements in the jobless rate, retail sales as well as building approvals. Oz central bank has made adjustments to its interest rate 10 times in November since it started publicly announcing its monetary policy decision in 1990. Despite some improvements in the economy, the RBA signalled they would look for stronger signs of accelerating activity in the property market, manufacturing and retail industries before it would prepare to shift rates from current level. And even though uncertainty surrounds economic outlook, according to the RBA, demand outside the mining sector would pick up, providing additional boost for the economy.
Soon after the report the Aussie ended its two-day gain against the U.S. counterpart, falling almost 0.3% to 0.948. Glenn Stevens pointed out he is counting now on a weakening in the exchange rate in order to re-adjust nation’s growth model. Despite the fact the RBA is looking for a weaker Aussie, analysts see little chance of another rate cut in the next six months.
This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.
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