Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“My guess is there will be a surge of anti-European/populist parties in France. It would be a very, very complicated political gamble for (President Francois) Hollande to try to force more European integration into an increasingly restless public opinion.”

- Gilles Moec, co-head of European economic research at Deutsche Bank

The Eurozone economy is strengthening and fears of another recession have eased after the latest positive data. Moreover, the strength of the single currency is reflecting optimistic changes in investors’ attitude towards the 17-nation bloc. According to the latest projections the economy will post a 1.4% growth in 2014, hence, there is a great opportunity for the Euro to strengthen further from the prospective of fundamental analysis. At the same time, Gilles Moec from the Deutsche Bank expressed his concerns that next year can bring disturbance on a political front.

Earlier this week data from the INSEE National Statistics confirmed that France, Europe’s second largest economy, has almost stalled in the third quarter, posting a sluggish 0.1% growth. With Francois Hollande struggling to restructure the nation’s economy, and his reforms being stifled at every turn, he is likely to lose some of his popularity. While latest polls showed Hollande’s approval rating advanced two percentage points to 22% in December, posting the first uptick since August, polls also showed gains for Eurosceptic groups across the continent. This month European leaders moved closer to a creation of a banking union, so the shaky banking sector will no longer be a major drag on government finances. Nonetheless, Nick Spiro, head of Spiro Sovereign Strategy stressed out that political disintegration will be the main theme of the next year.

USD

"We see a lot more certainty for 2014. With the unemployment rate falling, the Fed's action last week and the government budget agreement, all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast.”

- Christine Lagarde, IMF Managing Director

On December 18 Ben Bernanke has announced the tapering of the Federal Reserve’s stimulus programme by $10 billion per month starting January. Analysts, however, argue that the QE had limited effect on the U.S. economy and has created an enormous inflationary risk in case the economy starts to grow. During the last five years the Fed has tripled its balance sheet, by purchasing bonds, while unemployment rate still hovers above 7% and there have been little signs of an improvement in private sector, which represents the biggest part of the economy. Ending QE will now allow to focus on the real problems that caused economic slowdown and which, most likely, have little to do with the need for ultra-loose monetary policy.

The main concern for the Fed now is not just to taper off the recent bond purchases, rather then how to start unwinding them. While the market reactions suggests investors are welcoming the end of the QE, only because it reduces the level of uncertainty surrounding future plans of the Fed, the central bank is now likely to sell back what it has bought. Nevertheless, no one is going to buy these assets at same rates the Fed paid for them. Therefore, the difference between the acquisition and selling prices is the net increase of the central banks reserves. A selloff might help, however, the question is who will buy them back at any decent price.

GBP

“Positive demographics with continuing immigration [and] rather less exposure to the problems of the eurozone than other European economies combine with relatively low taxes by European standards to encourage faster growth than in most western economies”

- The Centre for Economic and Business Research

The U.K. will leapfrog Germany to become the largest economy in Europe by 2030, the recent survey from the Centre for Economics and Business Research showed Thursday. A rapid growth of population, low taxes, insulation from the worst of the Eurozone’s financial problems and positive fundamental data will all be contributing to Britain’s rapid growth during the next two decades. While the pace of growth of emerging economies like India, Brazil and Russia will force the U.K. to slip down in the global rating, the company predicts the country to become the second most successful western economy after the United States.

The research also showed that a deutschemark-based Germany will be stronger than the one having the shared currency in circulation. Regarding other European countries, France will drop to 13th position by 2028 from current fifth position, while Italy will become the world’s 15th largest economy during next 15 years. Current Italy is the eighth biggest economy.

Meanwhile, another factor that is benefitting British economy, is a decision not to join the Euro, the company said. The cable has been trading above the strong psychological level of 1.60 during the second part of the year. In the meantime, the CEBR pointed out that these forecasts should be treated with caution due to unpredictable fluctuations in currencies.

JPY

“If we look at the period pre-crisis in Japan we had dollar yen in a 103 to 125 range. We're finally breaking back into the pre-crisis range for dollar-yen.”

- Timothy Riddell, head of global markets research for Asia at ANZ

Despite low trading volumes the USD/JPY currency pair is climbing higher, as the Yen hit a five-year low at 104.83 versus the buck on Thursday, heating up speculations the pair can rally further next year. A week earlier economists from Societe Generale said the pair can reach 115 over the next 18 months, as they expect more stimulus from the Bank of Japan. The recent performance, however, forced analysts to become even more bearish, suggesting the Japanese currency can fall as low as 125 per Dollar by the end of the next year. Kuroda’s pledge to continue his unprecedented stimulus programme as well as the fact the Federal Reserve starts trimming its QE are making this forecast quite realistic.

The depreciation of the Japanese currency has been one of the biggest stories of 2013. The currency has lost more than 20% against the greenback amid Japanese government’s efforts to radically reform the world’s third largest economy in a bid to achieve its 2% inflation target within two years’ period. However, after a sharp drop in the first half of the year, the downside trend appeared to lose steam, as taper talks and doubts about Abenomics ability to boost growth prompted the Yen to rebound back to 94 level in June. Nonetheless, the recent positive data from Japan and fresh news from the Fed helped the Yen’s downward trend to regain some momentum by the end of the year.

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

According to Dukascopy Currency Index the New Zealand Dollar advanced 4.70% versus the basket of other major currencies during the last 130 days. The NZD/USD currency pair has moved back to 0.8166 amid Fed tapering, while AUD/NZD was one of the most bearish pairs due to fears the RBA’s easing cycle is not over, while the RBNZ is expected to start raising rates in the coming months. The pair reached this year’s low of 1.0717 on December 18 and bounced back. However, future changes in RBNZ’s monetary policy are suggesting the pair will dip even lower.

During the last policy meeting the RBNZ signaled they will increase the official cash rate as it is needed to keep future inflation outlook around the 2% target midpoint. Vast majority of analysts believe the first rate hike will be made during March policy meeting, while for a whole 2014 they expect the RBNZ to push the key refinancing rate up to 3%. The economy posted a 1.4% growth in the third quarter– the fastest pace in four years. Moreover, inflation ticked up to 1.4% over the same period. The central bank has lowered its inflation forecast, saying it will stay at 1.5% next year, affected by a stronger exchange rate. The last but not least is a stable improvement in the labour market, as employment rose by 1.2% in the third quarter, from a 0.4% gain the previous three months. Therefore, everything is currently speaking in favour of stronger kiwi next year.