Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries”

- Mario Draghi, ECB President

Financial markets were shocked on Thursday following the ECB press conference, after which the single currency plummeted to 1.329 against the greenback. While analysts were betting on no action from the ECB and expecting another bold statement, pledging to “do whatever it takes to save the Euro”, Mario Draghi made an unexpected move and trim the main refinancing rate by a quarter point to a new all-time record low of 0.25%. The unpopular decision reflects an outlook of low inflation and economic weakness in the region.

In October Eurozone CPI stood at 0.7% - the lowest since January 2010, while prices in highly-indebted Greece have not risen since July. Moreover, some analysts are expressing their concerns over inflation in Spain. Following this worrying sign, Draghi added more fuel to the fire by saying the Eurozone would face a prolonged period of subdued inflation, while interest rate would remain at current level or even lower for the foreseeable future. Moreover, Draghi floated the prospect of a negative deposit rate, while officials pointed out its effect cannot be adequately predicted. The implementation of negative interest rate is likely to hurt banks’ profitability by decreasing money-market rates, likely hampering credit supply to businesses and households, as well as cutting banks’ incentive to lend money to the other financial institutions.

USD

"We haven't seen an acceleration in growth yet that the Fed is looking for to begin tapering"

- Joshua Dennerlein, an economist at Bank of America Merrill Lynch

The U.S. economy grew at the fastest pace this year while households moderated their spending and businesses cut investments. In light of the partial government shutdown and debt-ceiling talks earlier this quarter, there is a little chance of a pickup in growth before the end of the year, analysts say. The Commerce Department estimated that the U.S. GDP rose 2.8% on an annual basis in the third quarter, up from a 2.5% advance in the prior three months. The major contributor to the economy’s growth was a one-time buildup of inventory among businesses, which is likely to reverse in case demand is not strong enough for companies to draw down those stocks. A gauge of domestic demand increased 1.7%, which analysts believed was insufficient to urge the Fed to wind down its bond purchases. However, the longer the U.S. central bank maintain its QE programme unchanged, the higher the odds it will face a year without any money to give the U.S. Treasury. This could invite increased scrutiny from lawmakers, who are already critical of the Fed’s policies. As William C. Dudley, Federal Reserve Bank of New York President, said last month, the central bank’s balance sheet expansion creates some budget risk, which threatens the institution’s independence. The Fed receives interest payments on holdings of government securities and mortgage debt, which are used for the operations of its board of governors and 12 regional reserve banks, returning the remained to the U.S treasury.

GBP

“I don't think we'll even get a statement tomorrow so we will be waiting for the Inflation Report and focusing on the unemployment rate"

- Ross Walker, an economist with RBS

As it was widely expected markets gone wild on Thursday, even though there was no surprises from the U.K. policymakers. The Pound lost 0.07% against the U.S. Dollar, after the Bank of England decided to keep its quantitative easing unchanged, while the key refinancing rate stood at the record low of 0.5%. The BoE stayed pat on the monetary policy in November partly due to the fact they are preparing the presentation of central bank’s quarterly update to growth and inflation, as well as its forward guidance, scheduled on November 13.

Carney also said they would not even think about raising rock-bottom interest rate until country’s unemployment rate falls to 7% or even lower, that is not expected to happen until late 2016. Nevertheless, investors are betting unemployment would fall much faster, given the speed of economic amelioration this year, as the U.K. has become one of the fastest growing nation’s in the world.

Among constantly growing optimism about the U.K. economy, Mark Carney stressed out he may be forced to curb market’s enthusiasm if he wants to keep the recovery on track. On the back of strong fundamental data the Pound advanced 5.6% against the Dollar since the start of July. However, the BoE is expected to raise its growth forecast.

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

October was a good month for Swiss policymakers, who seek a weaker Franc, as Swiss Franc depreciated 0.6% against the shared currency and 0.2% versus the U.S. Dollar. In contrast, Swiss National Bank’s foreign-currency reserves climbed higher over the same period and due to the same reason.

On Thursday the SNB said its holdings stood at 434.7 billion francs in October, up from a revised 433 billion a month earlier, slightly higher from 434 billion estimated by analysts. Still the figure is below the all-time high of 444 billion recorded in May. During the third quarter the SNB held 48% of its reserves in Euro, 27% in Dollars, while the proportion of equities soared to 16%. The remainder of the reserves are mostly held in highly rate government securities. The Swiss Franc is considered as a haven among investors, hence in times of heightened market stress and concerns over Eurozone’s economy, the Franc almost reached parity with the Euro in August 2011. Since then the SNB has amasses record foreign-exchange reserves through its market intervention in order to defend the cap of 1.20 per Euro seeking to prevent deflation and boost economic growth. However, there was no need for any intervention for more than a year, while SNB’s President Thomas Jordan is constantly reiterating his pledge to defend the cap for as long as it is needed.

AUD

"The unemployment rate edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment.”

- Glenn Stevens, Reserve Bank of Australia (RBA) Governor

Australian Dollar fell to 0.9465, hitting Tuesday’s low after disappointing data from the Oz labour market. Australia’s Dollar fell almost 0.5% versus both the U.S. Dollar and single currency, almost eroding Monday’s gains. Australian Bureau of Statistics said that despite a pickup in business confidence, Australian companies showed their reluctance to hire more staff, posing significant challenges for the RBA, which is trying to boost job opportunities in other sectors amid waning investment from mining sector. The overall unemployment rate remained unchanged at 5.7% in October, from a revised 5.7% recorded a month earlier, widely meeting analysts’ predictions. The main disappointment came from the number of full-time jobs, where indicators plunged 27,900, the most since June 2012. Moreover, the total number of people employed advances just by 1,100, significantly below estimates for a 10,000 gain. Another important indicator that represents situation in the labour market is participation rate that held steady at 64.8%. It means the proportion of Australian active in the labour market is standing at the lowest level since October 2006.

Whereas traders unwound bets that Australian central bank’s next interest rate move would be an increase, spurred by a rebound in consumer and business sentiment, latest data from the labour market are raising concerns the easing cycle may not be over yet.