Daily Forex Fundamental Overview

Fundamental Analysis

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

Last week seven out of nine major currencies either gained or lost more than 1%, making them highly attractive for traders. Amid main gainers were the single currency, Pound, Swiss Franc and Swedish Krone, advancing 1.22%, 1.15%, 1.12% and 1.70%, respectively. In contrast, Japanese Yen, Aussie and Kiwi lost 1.23%, 1.82% and 1.55%, correspondingly.

The most traded currency pair, EUR/USD, has moved to its highest level since October 31; however, was not able to move further, suggesting weekly and daily resistances are holding the pair. The shared currency was boosted by the positive data from Germany and Spain, as fourth-largest economy in the Eurozone has finally emerged from a recession, while a series of the better-then-expected macroeconomic reports are suggesting Europe’s largest economy will be building up steam in the coming months. The data from the U.S. had little impact on the pair, and, as a result, the greenback advanced only 0.06% over the week. During this period, EUR/USD is likely to be even more volatile, as policymakers in Europe will gather to discuss the monetary policy. Mario Draghi is expected to refrain from any additional stimulus measures. Even ECB council member Jens Weidmann said that is was not prudent for the Eurozone's central bank to signal its next policy decision immediately after the recent interest rate cut. Amid a lack of fundamental data from Europe, the EUR/USD is likely to be driven by news from the world’s largest economy. The unemployment rate is expected to fall to 7.2%, while the non-farm payrolls are likely to ease back to 185,000 in November, from 204,000 a month earlier. While the labour market could disappoint the Fed, analysts believe the economy itself will accelerate to 2.9% in Q3 from the previous estimate of 2.5%, suggesting the economy is strong enough to continue developing without any stimulus. Taking it all into account the EUR/USD is more likely to drop back to 1.3330 (weekly S2, November’s low), rather than inch higher to 1.38. At the same time, 60% of traders are holding short positions, expecting the pair to depreciate, while 59% of pending orders in a 100-pip range (from 1.3611) are placed to sell the pair, ready to provide additional support to bears.

Also last week the cable hit 1.6374, almost reaching this year’s high, following the highly anticipated press conference of the central bank Governor Mark Carney in London. The Governor addressed growing concerns over a housing bubble, by saying the BOE has no power to either curb or stop government schemes, like Help to Buy; however, they are planning to end the incentives for mortgages in a package designed to fight risks to the financial stability. It means the period of cheap money is coming to an end, supporting the case of a sooner-than-expected rate hike from the BOE. During the next five trading days the Pound can move even higher and add to last week’s gains, as it is a period of reports from key sectors of the U.K. economy– manufacturing, construction and services. Moreover, on December 5, the BOE meeting is scheduled, where Carney can either adjust the monetary policy or shed some light on future plans. Therefore, the cable can renew this year’s high and move toward weekly resistance at 1.6476.

EUR

“The November manufacturing PMI surveys bring good news on the whole, but suggest there's still a lot to worry about in terms of the health of the euro zone economy.”

- Chris Williamson, chief economist at Markit

Eurozone factory orders expanded for a fifth month in a row in November, with the corresponding gauge accelerating at the fastest pace for more than two years, a survey from Markit showed Monday. The final manufacturing PMI stood at 51.6 in November, up from 51.3 a month earlier, slightly outpacing analysts’ forecasts. A good sign is that the index has not slipped in the negative territory since July, when it reached 48.8. Moreover, this leading indicator of economic health has been improving since August 2012, after it hit a low of 44.0. While this data can be interpreted as a welcoming sign for Europe, they also mask considerable variations between individual members of the 17-nation bloc. In November such countries like Netherlands, Austria and Germany, all posted readings greatly above the threshold level of 50. In contrast, the full list of countries reveals some surprises. Even though France is not one the members that needs a bailout, it was at the bottom of the list in November, with the corresponding gauge standing at 48.4.

Some analysts may consider these numbers as highly volatile, since they represent monthly changes, but one thing that almost all countries have in common is weak job markets. A sub-index of hiring plans contracted for the 22nd consecutive month, suggesting even more job cuts will come.

USD

“With the government shutdown over, with global growth picking up, we’ll see solid growth in manufacturing.”

- Gus Faucher, senior economist at PNC Financial Services Group Inc

It was not a surprise that Bernanke’s speech, which was highlighted in all economic calendars as a high importance event, had practically no impact on markets on Monday. Ben just provided welcoming remarks, and obviously avoided the widely-discussed tapering topic. Nevertheless, the greenback gained some traction in the beginning of the week, as manufacturing sector strengthened in November, while construction spending climbed in October, suggesting they will help propel the world’s largest economy in early 2014. A report from the Institute for Supply Management showed an index, measuring activity in the manufacturing sector, soaring to 57.3 in November, the highest since April 2011, beating analysts’ expectations for a 55.1 figure and higher from 56.4 posted a month earlier, with all measures of orders, production and employment improving. This was the sixth-consecutive month of quicker growth in sector since contraction in May, while the most remarkable growth was recorded after the partial government shutdown that dragged on the activity in October. Meanwhile, the forward-looking index rocketed to the highest since April, rising to 63.6 from 60.6.

Construction spending jumped 0.8% to an annual rate of $908.4 billion, suggesting record-low interest rates are finally starting to have an impact of the economy, and, together with strong manufacturing sector, are pointing at solid performance in the beginning of 2014.

GBP

“UK manufacturing continued to hit the high notes in November. It looks as if the strong recovery in the sector is translating into meaningful job creation.”

- Rob Dobson, Markit economist

The Pound hit the highest level in 27 months against the U.S. Dollar, advancing to 1.6441 after a survey from Markit showed manufacturing activity expanded at the highest pace since February 2011, suggesting the recovery is maintaining momentum in the final quarter. Activity in one of the key pillars of Britain’s economy remained highly above the contraction line in November, with manufacturing PMI standing at 58.4 from a revised 56.5 in the preceding month and beating analysts expectations of 56.1 points. The employment sub-index climbed to 54.5 over the same period, compared with 51.9 recorded in the prior month.

Also Monday the official data showed that lending to households and companies increased at the fastest pace since the credit-easing scheme was launched in June 2012. Net lending under the Funding for Lending scheme reached 5.8 billion pounds over the quarter to September, up from 1.6 billion in the previous quarter, reflecting solid improvement in credit conditions.

In terms of the future outlook, the central bank now predicts growth to rise at an even faster pace in the fourth quarter of this year, even though the GDP is still likely to remain below the pre-crisis levels. The BoE currently expects a 0.9% expansion in the fourth quarter.

JPY

“I don't think hitting the 2% target in about 2 years has become more difficult. I also don't see the need to review the target and have no intention of reviewing it.”

- Haruhiko Kuroda, BoJ Governor

Confident in reaching the inflation target as planned? Since the announcement of the unprecedented stimulus programme in April, more and more analysts have been expressing their concerns the threshold will not be reached according to the schedule, taking into account global headwinds and domestic downside risks. Nonetheless, on Monday BoJ Governor Haruhiko Kuroda pledged to adjust monetary policy if needed in order to achieve its 2% inflation target and revive the world’s third largest economy. The Japanese Yen plunged to the lowest level since May against the greenback and plummeted to a five-year low against the Pound.

Kuroda also mentioned that the currency exchange market is considered as stable, which is vital for any economy and its expansion. More Yen depreciation, however, is welcomed by the central bank in terms of reaching its price level and boosting exporters’ profits. Meanwhile, the Governor began stressing the point that the BoJ would act without any hesitation in early November as some of the policy members called for a closer watch on factors that are weighing on the economic performance. Also given the upward bias in the CPI data so far, a safety margin of about 1% is crucial for the BoJ, which justifies its target to boost consumer prices to stable 2% and keep it around this benchmark level in the future.

CHF

“Given the vibrant production activity and the solid volume of orders on hand, businesses evidently are hiring more personnel or are laying off fewer workers.”

- Paul Ferley, assistant chief economist at Royal Bank of Canada

Activity at Swiss manufacturing sector expanded for an eight consecutive month in November, posting even stronger growth than a month earlier, suggesting a modest recovery is underway, while improvement in the economic sentiment is pointing at a greater confidence. A survey by Credit Suisse and procure.ch revealed on Monday a gauge of manufacturing activity accelerated to 56.5 last month, 2.3 points higher from 54.2 a month earlier and above analysts' expectations of a 55.1 figure. The indicator has been hovering above the 50 threshold since May, the level which indicates expansion of the sector. Meanwhile, production output stood at 58 in November, 1 point higher from October’s reading. In addition to that, the employment sub-index added 3.8 points to 56.3. Nevertheless, stock of finished goods plunged to 45.9, and with rising demand and solid job growth this figure suggests that the turnaround time of goods is now shorter than earlier.

Resilient domestic demand was among the main pillars of the economy so far; however, its fortunes are closely tied to the Eurozone, which is only starting to recover. Even though both Swiss and Eurozone economies are starting to improve, risks for recovery are still high. The fact the SNB seen removing its cap on the Swiss Franc in early 2015, can be interpreted as a sign of future solid performance of the Alpine country.