Daily Forex Fundamental Overview

Fundamental Analysis

Last week’s overview, this week’s key events

It could be surprising, but the single currency was the main gainer last week, as it advanced 1.08% versus other major currencies. Such a performance looks unreasonable, when taking into account fundamental data from Europe. Region’s industrial output, inflation, payrolls and the economic output as a whole, disappointed market participants. The main jump in Euro was registered on Tuesday, November 12, with EUR/GBP rocketing 84 pips. Moreover, the cable was highly volatile, fluctuating in a 130-pip range on Tuesday and Wednesday. The main reasons for such a behaviour were weaker-than-expected inflation data from the U.K. and welcoming signs from Britain’s labour market, while on Wednesday the BoE lowered its inflation estimates. Among other major gainers stood the greenback, Swiss Franc and British Pound, that inched up 0.71%, 0.61% and 0.52%, respectively.

In contrast, the Japanese Yen lost 1.60% over the week, and hit three-digit level against the U.S. Dollar, after weaker-than-expected growth in the third quarter. On Friday, USD/JPY traded at 100.38, penetrating key resistance at 100, represented by a strong psychological level and an uptrend-resistance. Moreover, the pair is no longer trading in rising wedge pattern boundaries, meaning, higher prices to come. The rally is likely to continue, as 72% of traders are holding long positions, while 64% of pending orders are placed to buy the pair, providing additional support for further appreciation. From the perspective of fundamental analysis, the pair has strong potential for another rally, as on Thursday, November 21, Bank of Japan members may signals additional stimulus measures, in case the majority of policymakers would be able to assure Haruhiko Kuroda current measures will not provide stable growth and 2% inflation. In a longer perspective, potential targets for long traders could be weekly resistance and September 11 high at 100.69, while at 101.54 is located July’s high.

Another pair worth paying attention this week, is AUD/USD, as on Thursday, November 21, RBA’s Governor Glenn Stevens testifies. During the speech titled "The Australian Dollar: Thirty Years of Floating", he may provide some hints on whether the easing cycle is over, or the resource-rich economy needs additional boost. Based on the latest fundamental data, some dovish comments could be expected, hence, AUD/USD is likely to turn lower. At the moment of writing the pair stood at 0.9334, just 70 pips above the strong support represented by 23.60% Fibonacci Retracement. Moreover, since October the pair has been trading in boundaries of a channel down pattern, and a move to 0.9374 is unlikely. Moreover, there is a bunch of strong resistances around 0.95 (200—day SMA, 38.20% Fibonacci Retracement and weekly resistance).

EUR

“The ECB wants to understand the effect the rate cut has had on liquidity, on credit growth and on monetary aggregates. If the effects are not significant, they will go for a new LTRO. I think they will have to act again.”

- Matteo Cominetta, European economist at HSBC Holdings Plc

During the last five years European policymakers have resisted to launch their own quantitative easing programme. After a recent cut of interest rates, Mario Draghi is unlikely to announce any additional liquidity injections during the next month. Moreover, the latest poll conducted by Bloomberg shows that 77% of respondents expect the announcement of long-term loans not earlier that in the first of second quarter of 2014. With interest rates close to zero analysts are making their bets on how far the ECB is prepared to go if inflation slows further.

The 17-nation economy expanded by just 0.1% in the third quarter, at the pace well below levels seen in the U.S., Japan or the U.K. In addition to that, worrying sign came from France, where economy contracted 0.1%. These figures could be interpreted as a failure of austerity measures and structural reforms, and as a sign that the ECB could stick to other measures. While money-printing is beneficial for the economy, a research conducted by the McKinsey Global Institute found other side of this measure. The main beneficiaries of stimulus programmes are governments, which see their borrowing costs driven down, while wealthy people’s assets are rising, fuelling inequality. The main losers however, are savers, pensioners and ordinary workers, who are experiencing prices increases without a corresponding growth in wages.

USD

“The week, we really want to be focused on the typical Fed kind of talk—but I also want to look at that jobless claims number, because the Fed is very dependent on data for their December meeting”

- Jeff Kilburg of KKM Financial

The guessing game about when the U.S. central bank will start withdrawing its stimulus programme enters a new round this week, as market are focusing on Wednesday’s FOMC meeting. Between Ben Bernanke’s speech and FOMC minutes investors will seek to determine whether there will be December tapering, or policymakers would refrain from any bold statements and wait for Janet Yellen entering her position. All eyes are on the Fed’s next meeting on December 18, when the Fed could finally make the long-awaited statement that they would start reducing the pace of their monthly bond purchases. In fact, markets ignore that possibility at their own peril, as there is a high possibility of abnormally high volatility before Christmas.

Meanwhile, stimulus programme and ultra-low interest rates have been the main reason of this year’s market’s advance. Janet Yellen comments that any change to the central bank’s accommodative policies is not imminent, have lifted stocks to fresh highs, while any shift to the policy would cause much market turmoil. There is low possibility of taper hints this week; however, taking into account strong payrolls, December’s meeting looks like an appropriate time to move. The U.S. Dollar is likely to remain under pressure in the first half of the week, with EUR/USD opening higher and trading above 1.35 already.

GBP

“Those fearing a return to a credit-fueled bubble will be reassured by the teeth of the new rules and how they are clamping down on the aspirations of some of the early applicants into the Help to Buy mortgage arena”

- Miles Shipside, Rightmove director

Concerns over a growing housing bubble in the U.K. have eased on Monday, as data from Rightmove Plc showed asking home prices fell this month after a 10% hike in October, suggesting government schemes to boost demand for property failed to offset the typical pre-Christmas decline. Values in London plunged 5% in November, to an average of 517,276 pounds, while across England and Wales, prices fell by 2.4%.

While estate agents across the country are reporting government schemes have definitely contributed to the growth of a housing market, the latest research shows that challenges, limitations and benefits of these programmes are still not fully understood, hence, they are working not at its full capacity. Furthermore, a lack of the end date of the recently-launched Help to Buy programme may lead to a serious distortion in the property market. The concern over programme’s feasibility is based on statistics. Last week, David Cameron claimed that 2,384 people have been already accepted for a mortgage under the programme; however, just 10 of the applications were completed so far. And without a clear exit strategy potential home-buyers are likely to remain cautious and will not show willingness to make huge purchases. Nevertheless, Monday’s report is suggesting there is no risk of a looming housing bubble in the U.K., while government schemes needed to be improved to achieve a long-term sustain demand for property.

JPY

“People have been deceived by ‘Abenomics. Monetary easing is not working, and it’s going nowhere. There is no demand for funds on the part of businesses. That’s why the monetary easing is not working.”

- Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies

The Japanese Yen fell on Monday, hitting almost a four-year trough against the single currency, amid upcoming central bank gatherings all over the world. Though the Bank of Japan is likely to maintain its ultra-loose monetary policy on Thursday, Kuroda may reassess his approach towards inflation and say when the U.S. tapering would affect the world’s third largest economy. Even despite weak third quarter GDP data many board members expect the Japanese economy to keep gaining momentum, on the back of strong consumer spending in the run-up to April’s hike in the consumption tax. On the other hand, amid subdued exports and grim outlook for overseas economies, the BoJ is seen holding off on raising its growth outlook. As the economy lost steam in the third quarter, some of the members are starting to express their concerns that Japan may not see 2% inflation in two years. This fact keeps alive market speculation of additional stimulus measures from the BoJ sometime next year, meaning the Yen could fall even further.

There are growing signs of inflation in Japan; however, Abenomics are allowing the debt-ridden government to issue more bonds constantly, adding to concerns of a fiscal crisis. Analysts are warning that Shinzo Abe’s government is walking a narrow path of trying to boost growth, while also seeking to prevent interest rates from surging at the same time.

CHF

“In my opinion the euro-swiss cap at 1.20 is useless already today and SNB will leave as a future backstop”

- Attilio Bertini, head of research at Credito Valtellinese

Is Alpine economy strong enough to withstand looming domestic and global risk in order to develop at a sustained pace without central bank’s support? A poll conducted by Bloomberg showed that 64% of economists expect the Swiss National Bank to remove the cap after the first quarter of 2015. Some analysts, however, expected the cap to be lifted next year, and some see the same measure happening a year later. The Swiss Franc is considered as a safe 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 interventions 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.

This year, however, the Franc fell 2.2% against the Euro, as the risk of a break up on the 17-nation bloc that shares Euro recedes. Though external risks begin to wane, Swiss inflation is still surprising markets to the downside. 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, and bolstering the case the cap is still needed.