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 its value, with single currency falling 0.09%, 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– Japanese Yen, managed to advance 0.40% against the basket of other major currencies. What is more important, is the fact 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 have predicted 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 Australian economy lost 22,000 in December, while 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 . 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, the 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 has receive 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

“The fundamentals of the German economy remain strong. In our view, there are sufficient arguments in favor of an acceleration of economic growth rather than in favor of a drop in soft indicators.”

- Ratings agency Moody's

Investors, politicians, analysts and consumers across Europe are anchoring their hopes on Germany– Europe’s powerhouse. The resilience of German economy was one of the main factors that helped to pull out the 18-nation bloc from its deepest recession ever. Therefore, market’s attention was attracted to a report from the ZEW Center for European Economic Research.

A survey showed German investor mood unexpectedly deteriorated in January, raising concerns about the stability of European economic recovery. A gauge of investor and analyst expectations, which was designed to predict economic performance over the next six months, slid to 61.7 this month, easing back from a seven-year high of 62 a month earlier. A measure of current conditions stood at 41.2 in the reported month, climbing from December’s 32.4 reading and beating analysts’ expectations of just 35 points.

While market’s reaction was modest, with EUR/USD losing just couple of pips, and analysts still believe German economy is doing well, the latest fundamental reports are sending alarming signs. Europe’s largest economy posted a surprising budget deficit over the last year, while nation’s GDP advanced only 0.4% in 2013, down from a 0.7% growth a year earlier.

USD

"Americans will likely need to see consistent improvement in economic measures and noticeable increases in their paychecks before feeling significantly more positive about the economy”

- Gallup company

Amid a lack of fundamental data from the United States it is worth having a look at latest researches conducted by Gallup research company. A couple of days ago analysts in the United States claimed the world’s largest economy is poised for a strongest growth since 2005 even despite last year’s domestic and global headwinds.

Nevertheless, the latest survey from Gallup showed that disappointing jobs report became a massive drag on consumers, pushing a weekly gauge of economic confidence to –16 from –13 a week earlier. A deterioration, however, can be short-lived and should not be interpreted as an alarming sign for U.S. policymakers, as the average headline numbers toward the end the last week settled between the –10 registered before the payroll report and the –18 soon after data was out.

Meanwhile, the current assessment of the economy and consumers’ expectations of future developments, which are the main components that make up the confidence index, both trended down since the first day of 2014. The outlook suffered even more, the company said. Another fact that supports the idea jobs report will be stripped out, is the comment of the Fed spokesman John Hilsenrath, who believes the Fed will trim down its monthly purchases to $65 billion per month during the next week’s meeting.

GBP

“Rephrasing and redesigning guidance is going to be pretty challenging because the jobless threshold was a compromise across all of the committee. It will be much harder for them to compromise or agree on the right diagnosis for the U.K. economy in this environment.”

- Neville Hill, an economist at Credit Suisse Group AG

While the Pound approached a two-week high versus the shared currency amid the upcoming jobs report, Mark Carney’s quest to understand the strength of the nation’s economy takes on greater urgency. The unemployment rate is expected to reach 7.3% in the three months through November, inching closer to the 7% threshold, at which the central bank promised to review borrowing costs. According to the Bloomberg survey, eleven economists believe the jobless rate will fell to 7.2%, while only one expects an increase to 7.5%. Despite obvious improvements in the labour market, output per worker remains almost 16% lower compared with the level seen before the recession. Earlier this month, the E&Y Item Club pointed out the central bank should consider modifying guidance, adding a link to real wages. It seems that the whole debate about the productivity of the labour market has become very conflated with what is happening in a shorter-term. The MPC has linked their actions with the unemployment rate, however, judging by only one indicator, their forecasts will be made in a very uncertain space and cannot fully reflect what is happening with domestic economy.

David Miles, MPC’s external member, said that unwinding the stimulus programme will not trigger market turmoil or derail economic recovery.

CHF

"It will remain as it is for the time being. The Swiss National Bank is in the comfort zone, given the weak inflation rate in the euro area. That speaks for a stronger franc.”

- Cornelia Luchsinger, an economist at Zuercher Kantonalbank

The SNB was not busy during the last year, as the pressure on the Swiss Franc eased amid economic recovery in the neighbouring Eurozone. Moreover, the latest projections are speaking in favour of stronger Swiss economy in 2014. Currently, the government projects a 2.3% for 2014 and a 2.7% growth in 2015. These forecasts and bold statements from Swiss authorities raised speculations the cap on the Swiss Franc will be removed soon. In November, a poll conducted by Bloomberg showed that 64% of economists expect the Swiss National Bank to remove the cap after the first quarter of 2015.

The latest poll, however, suggests completely different actions from the SNB. Seven out of 20 economists predict the cap of 1.20 franc per Euro will be revised up in 2015, while the same number of specialists believe it will happen only in 2016. Just three experts said the ceiling will be abandoned later this year and the same number expects a removal in 2017. Last week, Thomas Jordan affirmed the necessity to keep the ceiling, which was introduced in September 2011 in order to avoid economic slowdown and stave off haven flows from the Eurozone. Moreover, the cap was launched to assure a stable inflation growth, and according to SNB’s projections consumer prices will rise this year and in 2015 by 0.2% and 0.6% respectively.

NZD

"With the ... economy appearing to be on a firmer trajectory than the (Reserve) Bank has assumed, this will translate into upward pressures on core inflation. The corollary to moving earlier is that the Bank will have to do less tightening later on, that would mitigate the New Zealand dollar potential to overshoot."

- Mark Smith, ANZ Bank senior economist

Upbeat inflation in New Zealand raises chance of rate hike in January High Last year the Reserve Bank of New Zealand promised to pull the trigger in the first half of 2014 and start raising interest rates, becoming the first developed country to do so. This pledge pushed the kiwi higher and heated up speculations New Zealand currency will be one the best performers this year. While analysts are making their bets on whether Graeme Wheeler and his team will revise the key refinancing rate on January 29, the latest inflation report increases opportunity of the upcoming rate hike.

On Tuesday Statistics New Zealand said consumer prices inched higher 1.6% in the final quarter of 2013, accelerating at the fastest pace since early 2012, beating analysts’ estimations for a 1.5% gain and moving higher from third quarter’s reading of 1.4%. On a monthly basis inflation surpassed the consensus forecast as well. The main upward pressure came from a leap in airfares, while a hike in dairy prices and housing costs pushed consumer prices as well. At the same time, vegetable prices turned lower 20%, while petrol prices fell 3.5%.

On the back of positive data, the kiwi jumped to 0.8337 against the American counterpart, while AUD/NZD approached a historic low and reached 1.0571. It seems, that kiwi’s appreciation will not be short-lived, taking into account stronger-than-expected fundamental data from New Zealand.