Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Unless the economic outlook transforms very quickly, it (the ECB) won't be able to resist the pressure for very long”

- Jonathan Loynes, chief European economist at Capital Economics

The shared currency lost 0.26% to 1.3497 against the U.S. Dollar, posting just a modest reaction to the ECB rate announcement. At the same time, the Euribor futures slipped meaning analysts still believe European policymakers will pull the trigger soon.

During its February’s gathering, Mario Draghi and his team decided to keep the main interest rate, at which the ECB lends to bank at regular loans, at a record-low of 0.25%, keeping it there for four straight months already. The deposit rate also remained unchanged at zero. While the consensus forecast stood for no change in the monetary policy, some analysts were making their bets on another cut in the key refinancing rate. Moreover, economists from Barclays and Deutsche Bank both claimed for a revision of the interest and deposit rates.

In January inflation eased back to 0.7% from 0.8% a month earlier, hitting the level, where it stood in October, when the ECB cut the rate to a fresh low. Despite fears of a persistently weak inflationary pressure, the central bank believes the 18-nation economy is recovering after emerging from the longest-ever recession last summer. Currently, analysts believe the next measure will be either the introduction of the U.S.-style stimulus programme or the implementation of negative deposit rate.

USD

“Cold and stormy winter weather continued to weigh on the job numbers. Underlying job growth, abstracting from the weather, remains sturdy. Gains are broad based across industries and company sizes, the biggest exception being manufacturing, which shed jobs, but that is not expected to continue."

-Mark Zandi, chief economist at Moody’s Analytics

It is hard to say uniquely whether the world’s largest economy is strong enough to keep its path to prosperity without the government support, as each month some of GDP components is sending alarming signs. This time it is trade sector, exports in particular.

On Thursday a monthly report from the Bureau of Economic Analysis showed the gap between imported and exported goods and services during December increased 12% to $38.7 billion, rising from November’s gap of $34.6 billion. Analysts, however, expected the indicator to hit $36.0 billion. The main reason for such a weak performance was a 1.8% drop in exports, that hit its lowest level in four months. At the same time, imports picked up 0.3%. For the whole 2013 the gap stood at $471.5 billion– the smallest since 2009. Earlier, the government has said that the trade sector was one of the strongest contributors to the 3.2% annual growth during the fourth quarter of 2013. Amid slowing growth in markets like China, concerns about the sustainability in the pace of growth in exports, and December’s reading is a reason behind these concerns.

Also Thursday, a regular report from the Labor Department indicated the number of initial jobless claims fell 20,000 to 331,000 last week, beating analysts’ projections for a 335,000 figure.

GBP

“The current formulation of forward guidance is dead. With an unemployment rate of 7.1 per cent, a threshold of 7.0 per cent does nothing to suppress expectations of future tightening.”

- James Ashley, an economist at RBC Capital Markets

The U.K. policymakers decided to stay pat on their monetary policy as well as giving no hints about further adjustment to the forward guidance. Even though some analysts believed the BoE will start raising interest rates this month, the decision to keep the benchmark interest rate at 0.5% and the stock of gilt purchases at 375 billion pounds, came in line with the median forecasts. At the same time, the central bank did not issue a statement alongside the decision, in contrast with speculations that it would. Economists now believe Mark Carney will seize the opportunity to report on the upcoming changes in the monetary policy during the next week’s inflation report.

Regarding Carney’s forward guidance– the policy aimed at reassuring market participants and the public that monetary policy remains ultra-loose and diminishing concerns the any changes will choke off the economic recovery. When the policy was first introduced in August, the central bank pledged not to raise interest rates until unemployment falls to 7% or below. At the time being, the BoE has no plans to start raising rates for some time, even despite the unemployment eased to 7.1% in three months to November. It was not a surprise that the Pound fell just 0.05% to 1.6300 following the announcement, as a move was widely anticipated by investors.

CHF

"It is a minimum exchange rate that at the moment guarantees adequate monetary conditions for Switzerland.”

- Thomas Jordan, SNB’s President

The Swiss Franc was almost unchanged against the U.S. Dollar and single currency, with crosses trading around 0.9041 and 1.2226 respectively on the back of mixed fundamental data from the Alpine country.

On Thursday the Federal Customs Administration said the merchandise trade surplus eased to 0.5 billion francs in December from 2.03 billion a month earlier, as the pace of growth in imports outpaced the increase in exports. A report showed goods exports advanced 5.2% to 14.69 billion over the period, while imports soared 8.4% to 14.19 billion. During the whole 2013 both shipments and imports rose 0.3%. At the same time, a separate report from SECO showed a gauge of consumer confidence inched higher to +2 in January from –5 in October, beating analysts’ expectations for a –1 reading. The largest contribution came from the sub index of future developments, with the corresponding index soaring to +18 from +1 in October.

It is hard to asses the overall economic performance of Switzerland, however, it is clear the SNB will be maintaining its cap on the Swiss Franc in the foreseeable future. The appropriate level of the Swiss Franc is one of the main priorities for the Swiss National Bank. In order to avoid Franc's further appreciation, the SNB imposed a cap against the Euro in September 2011.

AUD

"Much of the Aussie weakness in December-January was because of the continued perception the RBA was not happy about the high currency”

- A trader at a European Bank in Singapore

On Tuesday the Reserve Bank of Australia decided to maintain the benchmark interest rate at 2.5%. After 2.25% of rate adjustment since late 2011, the RBA is now switching to a "neutral" mode, as rising home prices and stronger inflationary pressures are expected to boost growth. Such a shift in the central bank’s mood was unexpected by analysts, as some prompted more rate cuts are ahead. Nonetheless, a bunch of fundamental data released Thursday is diminishing hopes of another intervention from the RBA.

The Aussie leapt as much as half a cent hitting 0.8981 against the U.S. counterpart, approaching its one-month high, bringing this week’s gains to almost 2% already. Australia became a net exporter in December, as trade surplus soared to $468 from an upwardly revised surplus of $83 a month earlier, boosted by a 4% increase in exports. At the same time, imports advanced only 2%, due to a 4% jump in imported capital goods. At the same time, Australian Bureau of Statistics said retail sales picked up 0.5% on December, posting the sixth consecutive monthly gain and meeting analysts’ forecasts. The last but not least, is the significant improvement in business confidence, with the corresponding gauge rising to 8 in the December quarter, compared with 3 three months earlier. This is the highest level since April 2011.