Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“We don’t have a definite agreement (…) but we have taken a big leap forward in order to reach it”

- Rimantas Sadzius, the Lithuanian finance minister and current president of Ecofin

While the single currency climbed to its highest level in six weeks against the U.S. Dollar amid key FOMC meeting next week, European leaders are moving closer to a deal that is likely to stabilize region’s financial sector, minimize risks of another financial crisis in the future and inject new impetus into the European economy. Finance ministers pledged to reach a political accord during the meeting in Brussels; however, some analysts believe that a further emergency meeting would be necessary to thrash out the remaining details. Even though a significant progress has been made, the deal is likely to be sealed during the two-day summit on December 19-20.

The idea of the so-called banking union emerged after a severe financial crisis almost destroyed the banking sector in countries like Spain, Cyprus or Greece. The first pillar of the union, the single resolution mechanism is already moving to its conclusion, as leaders agreed to appoint the ECB as the supervisor of bloc’s banks. While the worst for the financial sector is over, some countries like Germany are still reluctant to set a precedent by helping to repair banks. Amid the remaining questions, it is still unclear who will have the least word in case national authorities and the European Commission disagree. Hence, Germany, Finland and Slovakia want to have the final say to go to the EU ministers if required.

USD

“When you dent a president on honesty and straightforwardness, you have done major damage that can be difficult and time-consuming to repair”

- Bill McInturff, a Republican pollster

The U.S. President Barack Obama has suffered a serious political damage on Wednesday, as a new survey from the Wall Street Journal/NBC News showed the disapproval of Obama’s job performance hit an all-time high of 54%. Moreover, half of this figure are considering Obamacare to be a bad idea, which become a massive drag on the economy. The survey also showed there has been a sharp erosion in approval since the last year in many attributes, such as honesty, ability to act during a crisis and leadership. What is more interesting is the fact that back in 2010 almost 60% said the healthcare law was the decisive factor in shaping their view of Barack Obama. At the time being growing dissatisfaction with Obama contrasts with solid gains in assessment of current economic conditions and future outlook. Moreover, almost two-thirds said they are satisfied with their personal financial situation, which is definitely a welcoming sign for the government. Even though, during the partial government shutdown Republican’s popularity plunged to a record low, now the party enjoys a double-digit advantage on the handling of the economy.

While the inability to reach a consensus during the government lockout is weighing on politicians’ popularity, the latest 2014 budget deal marks slight improvement in their ratings.

GBP

“I find it inconceivable that, without forward guidance, I, or any of my colleagues, would have already voted to raise the Bank Rate and that the only thing that has stopped us is forward guidance”

- Martin Weale, BoE policymaker

The latest economic indicators are pointing towards a noticeable and increasingly broader revival of the British economy, and it is not a question that government measures and central bank’s policies are contributing to the growth. Nevertheless, the recovery is limited as investors are expressing their concerns over the sooner-than-expected rate hike, hence, companies are not showing willingness to dive into credit. Regardless of the growing pressure on Mark Carney to shed the light on his future actions, BoE policymaker Martin Weale said that forward guidance helped to lower uncertainty in the short-term, and providing additional boost to the economy. On the other hand, it is hard to believe that this effect is large over the longer term. He also stressed out that the impact of current policy is not limited by the likelihood that it was not completely understood by the public.

When announcing the forward guidance, Carney pledged to hold fire until jobless rate had fallen to 7% or lower, and as long as consumer prices did not show signs of getting out of control. According to the latest forecasts, people working in financial markets believe the profile of future rates is about 0.25% lower for the next two years rather than it would be without forward guidance. In addition to that Weale predicts that a one-year delay of raising borrowing costs will push output by between 0.5% and 0.75%.

JPY

“The figures should ease concerns that the fledgling recovery in business investment has already come to an end”

- Marcel Thieliant, Capital Economics Japan Economist

After weaker-than-expected growth figures, falling output at nation’s factories, as well as just slight improvement in consumer mood, Wednesday’s report provides some relief to Shinzo Abe, as machinery orders ticked up in October. This can be interpreted as an upbeat sign that companies are still willing to invest, and business spending may be set to take on a greater role in driving the world’s third largest economy in the final quarter. Core machinery orders, which is a leading indicator of domestic production, advanced 0.6% in the middle of autumn, squarely in line with analysts’ forecasts, and up from a 2.1% contraction a month earlier. On a yearly basis, orders posted even more solid growth, rising by 17.8% over a period, and accelerating from a 15.0% gain logged in the prior month.

A solid gain in machinery orders is a positive sign that businesses putting funds into equipment and facilities, and will provide support to the economic amelioration, even despite earlier data suggested such investment might be waning already. Moreover, government survey showed that companies are likely to increase their spending on facilities and equipment by 12% in the 12 months ending in March from the same period a year earlier. This is the highest forecasts since records began.

CHF

“You have a relative growth play that favours the Swissie over the euro. Markets are positioned for a boring SNB meeting Thursday with no change in band and total commitment to the main exchange rate, yet the data continues to improve.”

- Peter Rosenstreich, chief foreign-exchange analyst at Swissquote Bank SA

The Swiss National Bank is determined to defend its cap on the Swiss Franc, imposed in September 2011, for as long as it is necessary. This fact is clear to any person, who follows fundamental data or simply announcements from central bankers. At the same time, this policy and rates between zero and 0.25% have fuelled property prices, and the real-estate market is living through its biggest boom in two decades. Earlier this year the SNB has already forced domestic banks to hold more capital in order to temper the demand for property. However, this initial step on its own is unlikely to be enough to prevent a bubble from forming and additional measures would be needed.

An increase of interest rate is not considered to be a possible option, as the SNB targets to maintain the cap of 1.20 per single currency, which was implemented to avoid the economy falling into recession and so far, it has definitely, contributed to economic growth. The second and most likely option for the SNB is to raise the government-mandated buffer, which currently stands at 1%, and according to the majority of analysts, the central bank can require banks to hold as much as 2.5% extra capital on their mortgage-related assets. Regarding the supply, the number of apartments for sale that costs more than 1 million francs doubled since 2008, while the total number of on offer climbed only 10%