Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Next year, compared with the last two years, we will have rather strong growth but not a boom. We still see some problems in the euro area.”

- Ralph Solveen, head of economic research at Commerzbank AG

Following better-than-expected German ZEW economic sentiment, IFO Institute said the business climate in the Eurozone’s number one economy advanced for a second straight month in December, supporting the case of a quickening growth. A measure of business climate, which is based on a survey of 7,000 German executives, ticked up to 109.5 this month, accelerating from 109.3 a month earlier. The figure came fully in line with analysts’ forecasts. The index of current conditions, however, fell to 111.6 from 112.2 in November, and well below the forecast of 112.5 points. Solid improvement in sentiment as well as growing manufacturing production are all pointing at the ongoing recovery in Germany. Meanwhile, the world’s third-biggest maker of luxury cars– Daimler AG’s Mercedes-Benz, pledged to increase working hours in order to meet the growing demand. Despite welcoming data, the single currency inched higher just 0.1% reaching 1.3769 versus the U.S. Dollar. Subdued market volatility can be explained by low trading volumes in December, as well as the fact the real mover in the Forex market will be the FOMC meeting.

While there is a lack of volatility in the markets, the latest data is suggesting the bloc’s economy is gaining momentum, and easing concerns the ECB will be forced to act to achieve a long-term sustainable growth.

USD

"If incoming data broadly support the committee's support for employment we will likely reduce the pace of committee's purchases in further steps at future meetings."

- Ben S. Bernanke, Fed Chairman

Finally this day has come– it is the last Federal Reserve’s Open Market Committee before 2014. For weeks financial markets have been waiting for the decision as to whether the Federal Reserve will start reducing the pace of monthly bond purchases or not. While analysts are still making their bets and trying to predict market’s future movements, the U.S. housing starts soared to their highest level in almost six year last month, bolstering the case the housing market is strong enough to withstand the tapering.

The Fed announced its intention to start trimming its extraordinary monthly stimulus efforts by $10 billion a month from $85 billion to $75 billion, taking the first step to remove the incentives, which were designed to lower interest rates and boost economic activity to help the nation’s economy recover from the worst recession since the 1930s. The central bank referred to a stronger job growth as a reason to begin unwinding its programme of bond buying, and it said that the employment situation will improve faster than expected, with jobless rate falling from the current 7% to 6.3% in 2014. This could be a trigger for further reduction in the Fed’s stimulus efforts in the coming year. The Fed will cut its U.S. Treasury purchases from $45 billion to $40 billion a month, as well as the bank will reduce its buying of mortgage-backed securities from $40 billion to $30 billion per month. As a result, the U.S. Dollar rose versus most of 16 major counterparts.

GBP

“Today’s figures should give reassurance to markets that the period of inflation being way above target is behind us. It makes it slightly easier for the MPC to communicate its policy of keeping rates low. It’s not impossible that the 2 percent could be hit over the next three-to-four months.”

- Philip Shaw, chief economist at Investec Securities

The Pound soared against other major currencies on Wednesday after data showed the unemployment rate unexpectedly fell to the lowest level since April 2009 through the three-month period to October, inching closer to the BoE’s target and raising fears of a looming hike in interest rates. The number of unemployed people fell by 99,000 in the three months to October, meaning the total number of jobless people reached 2.39 million, or 7.4%- the lowest level since the February-to-April period in 2009. Analysts, however, expected the unemployment rate to remain unchanged at 7.6%. Moreover, there were 36,700 less people claiming Jobseeker's Allowance in November. The last but not least optimistic sign is that companies have finally started to raise wages, with average weekly earnings rising 0.9% over the corresponding period.

The data fuelled speculations the Bank of England will have to increase borrowing costs earlier than expected. When announcing the forward guidance, Mark Carney promised the policy will remain accommodative until the unemployment rate falls to or below 7%. But even then, the Governor said it does not necessary mean the central bank will pull the trigger.

The latest economic development is definitely contributing to Pound’s strength. However, the BoE

CHF

“The SNB currently faces no pressure to exit its very expansionary monetary policy. For 2014, we expect the SNB to keep the exchange rate floor unchanged.”

-Maxime Botteron, an economist at Credit Suisse

It seems that investors have lost their interest in Swiss fundamental data, and the only thing that has some impact on the Franc’s exchange rate are SNB meetings, where they usually reiterate the pledge to defend the cap for as long as it is needed. On Wednesday the joint report from the European Economic Research and Credit Suisse showed that after the temporary setback in November, the investor sentiment index increased by 7.8 point hitting 39.4, the highest level since May 2010, when it stood at 40.5. Moreover, the current situation index rose by 14.8 points to a level of 48.5. While these figure are pointing at accelerating growth, the expectations regarding the performance of the Swiss Market Index (SMI) have eased to 38.6 in December. When comparing the same index with its level seen in October 2013, it stood at 62.0. The main reason behind such a low level is first of all the coming tapering by the U.S. Federal Reserve. Nonetheless, improvements in the assessment of both Swiss and European economies are suggesting the ongoing recovery with rekindle demand for Swiss industrial goods, contributing to growth for at least next six months.

Taking into account better-than-expected data from the Alpine country it is hard to explain Franc’s movements on Wednesday, as it has depreciated against the basket of other currencies, with EUR/CHF rising to 1.2235, while USD/CHF climbed to 0.8902.

NZD

“If any more evidence was needed that the economy is now in recovery mode, this is it. In fact, people are the most upbeat about their finances that they have been in six years, and economic optimists now outnumber pessimists by the widest margin since December 2004.”

- Felix Delbrück, senior economist at Westpac

The kiwi was sold in 75% of all cases across the board on Wednesday, while 73% of traders were holding short positions on NZD/USD, suggesting New Zealand currency will depreciate. Additionally, a slight majority (53%) of all pending orders were placed to sell the pair, meaning in a long-term the pair has a potential to depreciate. In contrast, the fundamental data from New Zealand is drawing bright picture for the kiwi, as business confidence ballooned to a 15-year high in December.

The ANZ Bank Business Outlook index came at 64.1 this month accelerating from 60.5 in November, suggesting a net 64% of companies within the country are feeling upbeat about the future outlook. Confidence level in agriculture and services sectors jumped to the highest since 1994 and 1999, respectively. Together with consumer confidence at a four-year high the data pushed analysts to update their forecasts, as the economy is rebounding form drought conditions last summer and 2010 earthquake in Canterbury.

Earlier this month the RBNZ pledged to start increasing interest rates in the first half of 2014. Even though, the likelihood of higher interest rate have not weighed on business or consumer confidence.