Daily Forex Fundamental Overview

Fundamental Analysis

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

During the last trading week vast majority of major currencies lost some of their value, with the single currency falling 0.09%, the Dollar losing 0.19%, while the Pound, Aussie and loonie lost around 1%. At the same time, one of the last year’s main losers– the Japanese Yen, managed to advance 0.40% against the basket of other major currencies. What is more important, is the fact that Dukascopy traders changed their attitude toward the greenback and were buying it in the majority of all cases. Hence, the SWFX sentiment index for EUR/USD lost 16.90%, while the same gauge for USD/CHF advanced 42.14%.

A week earlier we predicted the Australian currency will depreciate on the back of weaker-than-expected data from Oz labour market, and it was not a surprise that AUD/NZD continued downward rally almost hit a historic low at 1.0543. The main reasons behind another drop of 318 pips are the fact the Australian economy lost 22,000 in December, whereas New Zealand business confidence soared to 52 from 38 a month earlier. While the pair has recovered some of earlier loses during the second half of the week, it is unlikely that the Aussie will start appreciating against the kiwi in a longer term taking into account upcoming rate hikes from the RBNZ and a possible cut of the interest rate by the RBA. Therefore, the next strong support is located at 1.0496, represented by weekly S1. This week the pair can be even more volatile, as statistics offices in both countries will post CPI data, which has a huge impact on central bank’s decision.

Two other major currencies worth paying attention this week, are the Pound and the loonie. While British economy is one the top performers now, the land of the maple leaf is still struggling to grow. Even though the Bank of Canada is unlikely to cut its key refinancing rate this week, manufacturing sales, retail sales and inflation are expected to deteriorate over the corresponding period. Taking into account U.S. Dollar’s strength and a possible decline of the loonie, USD/CAD has a great potential to penetrate ascending triangle’s resistance line, which can be found around a daily R1 at 1.099 and, hence, put weekly R1 at 1.1024 on the map.

The cable has been appreciating steadily since July 2013; however, after hitting 1.66 on January 2 the pair eased back to weekly S1 at 1.6316. This week, specially on Wednesday, the pair received another bullish impulse, as both claimant count change and unemployment rate are likely to show some positive trend, adding to signs the Bank of England will soon start raising rates. A key level for long traders is located at a weekly R1 and last week’s high at 1.6514.

EUR

“Having talked the talk, we believe the ECB will soon need to walk the walk. Draghi made clear that the Governing Council stands ready to act not only in the face of a weaker economic outlook, but also in direct response to any ‘unwarranted’ moves in money markets.”

- Peter Schaffrik and James Ashley, RBC analysts

Earlier this year analysts claimed that the European Central Bank will keep interest rates at current level of 0.25% until 2015; however, they have not excluded other measures, like the introduction of the U.S.-style bond-buying programme. Nevertheless, on Friday the Royal Bank of Canada pointed out that European policymakers will make another adjustment to its key refinancing rate, cutting it to a record of 0.1% in March in order to curb a rise in the Euro area’s money-market rates.

The Euribor rate, at which European banks are lending each other funds for three months, soared to the highest level since August 2012 on Friday, hitting 0.302%, as central bank’s liquidity declined. Central bank’s excess liquidity stood at 131.2 billion euros– the lowest level since December 2011. At the same time, a measure of the cost of overnight unsecured lending in the European interbank market advanced above the ECB’s rate of 0.25%. According to RBC economists, March meeting will be the most appropriate time to cut rates further.

Amid heating debates the ECB will pull the trigger soon, Mario Draghi tried to calm down markets by saying there is no need to cut the main interest rate, and there is no risk of deflation. Meanwhile, he added there are many encouraging signs, as recovery is broadening, easing trade imbalances as well as rising deficits.

USD

"We don’t think that financial stability concerns should at this point detract from the need for monetary policy accommodation which we are continuing to provide”

- Ben Bernanke, Fed Chairman

Ben S. Bernanke’s era is coming to its logical conclusion. Soon Janet Yellen will take over his position on January 31 and will become the world’s most powerful woman. ‘Helicopter’ Ben is known for his easy-money policy, and it was not a surprise that during a forum in Washington he defended his quantitative easing programme, saying it has helped the U.S. economy and there is no risk of a bubble in asset prices. Bernanke and his Fed are famous for his record-low interest rates, emergency lending measures, controversial bailouts and bond-buying programme, known as quantitative easing, that all are likely to have unintended consequences. Nevertheless, Bernanke claimed the world’s largest economy responded well and assured the central bank is still capable of addressing potential risks and headwinds like runaway inflation that may derail economic recovery.

At the same time, the University of Michigan said a gauge of consumer sentiment plunged to 80.4 in January from 82.5 a month earlier. However, this is the first out of two survey’s that are reflecting consumers’ mood, hence, market reaction was modest. On the other hand, U.S. industrial production advanced for a fifth straight month in December, coming in line with analysts’ forecasts. Output at factories, mines and utilities climbed 0.3%, following a 1% gain a month earlier.

GBP

“December’s strong retail sales performance provides a major boost to hopes that GDP growth in the fourth quarter of 2013 remained up around the 0.8% quarter-on-quarter rate achieved in both the third and second quarters”

- Howard Archer of IHS Global Insight

Are you still not tired from upbeat data from the U.K.? It is getting easy to predict Sterling’s behaviour, as British currency constantly benefits from positive fundamental data from the country. Last Friday was not an exception, with the cable soaring more than 100 pips on the back of stronger-than-expected retail sales. The pair reached 1.6458 and penetrated strong resistance at 1.6351. Moreover, the pair is no longer trading in boundaries of a descending triangle.

The main reason for such a remarkable performance is a report from the ONS that showed sales at British retailers gained 2.6% in December on the back of stronger demand during the key Christmas season. This is the highest monthly gain since record began in 1996. Moreover, the figure is stronger than the consensus forecast of 2.2%. During the fourth quarter, sales soared 3.2% compared with the same period a year earlier, and this is the highest rise since October 2007.

Despite improved economic activity, a spectacular rise in retail sales came as surprise to many analysts, as several surveys showed retailers and consumers were not looking that strong. Nevertheless, a stronger-than-expected report from retailers is sending promising signs, suggesting fourth quarter’s GDP can beat forecasts as well.

JPY

"Domestic demand has strengthened ahead of the sales tax hike, pushing up imports. This is likely to continue until March.”

- Takeshi Minami, chief economist at Norinchukin Research Institute

The abnormal rally performed by USD/JPY is running out of steam as the pair stuck around 104.3 and were not moving any higher or lower during the last two days already. However, this week the pair can move higher as on Wednesday is scheduled BoJ’s meeting, where Kuroda can provide some dovish comments.

While the world’s third largest economy is performing well and the central bank’s threshold inflation gauge past halfway to Kuroda’s desired 2% target, consumers are getting less confident about future prospects. Hence, the Cabinet Office said a measure of consumer confidence deteriorated last month after surging a month earlier, underscoring concerns that April’s sales tax hike will choke the nation’s budding economic recovery. The seasonally adjusted index of sentiment among Japanese consumers eased back to 41.3 from 42.5 a month ago and moving further away from the 50 level, which indicates optimists outnumber pessimists. Over the corresponding period three out of four index’s components declined, although consumers’ assessment of employment conditions climbed 0.1 to 48.2, pointing at some improvements in the labour market.

The data contrasts with Japan's economic revitalization minister Akira Amari comments, who said upward revision of economic outlook positively affected consumers’ habits, as they began feeling economic amelioration.

CHF

"The SNB can ... congratulate themselves that their policies, including the 1.20 Swiss franc cap, are very slowly working"

- Global Informa Markets analyst Tony Nyman

It seems that Swiss central bank has lost some grip as Alpine economy is sending alarming signals. During the last couple years we have seen little action from the SNB, as pressure on the Franc eased and the economy was developing steadily. While the EUR/CHF currency pair is fluctuating more than 300 pips above the threshold level of 1.20, Swiss officials posted a bunch of disappointing data.

Earlier this month the Office for National Statistics said consumer prices declined 0.2% in December, after staying flat in November. On a yearly basis prices steadied at 0.1%, yet missing estimates of a 0.2% gain. This leads the average annualised inflation last year to 0.2%. On Friday the same agency reported that another measure of consumer inflation sank in December, with producer and import prices falling 0.4% from the same month a year earlier. Prices were flat on a monthly basis and remained unchanged during the whole 2013. Nevertheless, this is a step forward, compared with 2012 and 2011 declines, when PPI dropped 1% and 0.9% respectively. The inflation data contrasts with other reports, such as KOF leading indicator, which predicts the economy will build up steam in the first half of 2014. The cap imposed by the SNB in September 2011 helped the economy to avoid slipping into recession; however, the latest data suggests Switzerland is facing a weak inflationary pressure once again.