Daily Forex Fundamental Overview

Fundamental Analysis

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

The Aussie, kiwi and loonie were last week’s top performers, each adding 2.54%, 1.24% and 1.68%, respectively, as previous week’s comments from central banks boosted investors’ interest in these currencies. At the same time, Dukascopy currency index showed that the single currency lost 0.92%, while the greenback plunged 0.66%. Therefore, the most traded currency fell less than 100 pips and was not able to move below the important support level at 1.3715, represented by a weekly and daily S1. What is more important, is the fact the Sterling index was almost unchanged over the period, despite the release of the CPI, retail sales and GDP figures. It means that Carney’s message has finally been understood by markets and only a high divergence from the expected figure can provide a strong impact on markets.

Dukascopy traders were selling the kiwi in 75% of the time, and 75% of opened positions are short, suggesting traders do not believe the NZD/USD pair will continue its appreciation. The only report that was published last week from New Zealand was the trade balance. The reading surprised markets to the upside, as demand from China was still strong. Moreover, after RBNZ’s comments more traders jointed bulls, pushing the pair to 0.8697. The pair is currently just 67 pips from the resistance line of the channel up pattern on a 4H chart and 170 pips from the historically highest level.

This week’s main highlight will be the ECB’s meeting, as Draghi and his team will try to solve the puzzle since Friday’s report from Germany showed inflation slowed to 0.3% in March. Speculations the ECB will pull the trigger next week have heated up after inflation rate moved back into dangerous zone at 0.7%. The upcoming meeting can potentially become a serious threat to the region's financial system and currency markets. However, this scenario can work only in case the ECB will go ahead with the increasingly popular idea of implementation of the negative deposit rate on bank deposits, hence, forcing domestic banks to pay for the privilege to park their money at the central bank. Last week ECB's officials have already signalled it is a top choice, while the IMF claimed the SNB should consider the similar measure. Any dovish comments from the central bank will provoke a massive selloff in the Euro. Key support lines for EUR/USD are located at 1.3715 and 1.3633. Moreover, slightly lower at 1.3585 is located a 200-day SMA and a support line of the rising wedge pattern on a daily chart.

EUR

"The relatively low inflation rate – measured by the consumer price index – is due to different trends. The expected increase in food prices (+2.2% on March 2013) is still contrasted by declining energy prices (–1.6%)."

-Destatis

Dukascopy traders still believe in bearish scenario on the EUR/USD currency pair, as 64% of opened positions are short. This time such an attitude is justified by weak inflationary pressure from Europe’s powerhouse. Inflation is a key concern for European policymakers, as risk of deflation stands around 30%. Therefore, Friday’s German CPI added another piece to the puzzle that Mario Draghi and his team will try to solve this week on Thursday.

A report from the German statistics office showed that consumer prices in Europe’s largest economy rose only 0.3% in March, from a 0.5% growth in the preceding month and falling short of market’s expectations for a 0.4% growth. On a yearly basis the CPI also ticked lower to 1.0% from 1.2% in the prior month and compared to predictions of 1.1%. When calculated using a harmonized method, inflation stood at 0.9%- in line with the consensus forecast. ECB officials have already warned that in case the mid-term outlook for inflation deteriorates further, they will be forced to take actions. However, April’s holidays can push price gains higher, suggesting policymakers can postpone the implementations of fresh stimulus.

The only bright spot that suggest the region’s economy is recovering is economic sentiment, which came at 102.4 in March following a reading of 101.2 a month earlier, easing some of the pressure on the central bank.

USD

“The momentum is shifting higher. It’s moving in the right direction, though we are starting from a lower base than otherwise would have been thought.”

- Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC

Consumer spending is still boosting the growth in the world’s largest economy. Earlier a report from the Commerce Department said that the U.S. GDP expanded 2.6% in the three months through December, more than the 2.4% reported earlier,; however, weaker than the 2.7% growth predicted by analysts. A report also unveiled that Americans were still willing to spend on services, especially health care, boosting the growth further, another sign that earlier slowdown was mostly provoked by a heavy snowfall and low temperatures. Friday’s report from the Bureau of Economic Analysis only confirmed the previous data by saying Americans spend 0.3% more in February than a month earlier, with spending accelerating from January’s 0.2% gain, meeting analysts’ expectations. Consumer purchases accounts for around 70% of overall economic activity.

Also Friday a report showed the price index for PCE advanced 0.9% on a yearly basis to February, hitting the weakest price growth since October. This indicator is the headline gauge of inflation for the central bank. With hawkish comments from Janet Yellen and stable inflation, policymakers appear to have brushed away risks of deflation. In contrast, the Fed is still facing a dilemma, as a rate hike will add additional pressure on inflation, and the PCE index will not be able to hit the projected 1.5%-1.6% by the end of this year.

GBP

“Businesses have begun 2014 in positive mood, with activity in the manufacturing sector and across the wider economy expected to rise at a healthy clip in the first quarter”

- Neil Prothero, deputy chief economist at EEF

British economy is on the mend; however, it has lost some the momentum in the beginning of 2014, therefore, markets were not expecting any surprises on Friday from the final GDP figures. Nevertheless, there were some chances that current account deficit will narrow more than expected, suggesting the recovery is broadening and economy is rebalancing.

The expectations were still low, therefore, a 22.4 billion pounds current account deficit for the final quarter pushed the cable only slightly below 1.66. While this is a better figure from previous month’s reading, it is only marginally lower than third quarter’s all-time high. What is more important is the fact exports fell by 0.4 billion pounds.

Separately, the ONS said the nation’s fourth quarter’s GDP was unrevised at 0.7%, mostly driven by services output, consumer spending and trade sector. On a yearly basis the economy posted a 2.7% growth, unchanged from the previous estimate, however faster than the 1.9% expansion recorded in the third quarter. The economy still remains around 1.4% below its pre-crisis peak that was reached at the beginning of 2008. The BCC already said that growth remains on course, that is why the cable continued its appreciation even despite disappointing data.

JPY

“We can’t be optimistic about the resilience of the economy after the sales-tax hike. It’s possible the government will have to compile another fiscal stimulus package this year. We expect the Bank of Japan will add easing in June or July.”

- Naoki Iizuka, an economist at Citigroup Inc.

Inflation is rising and moving closer to the official target of 2%, however, the looming tax hike on April 1 suggesting the progress can be eliminated. What is more important, is the fact the world’s third largest economy is smaller now that it was 20 years ago. The economy is going through three phases all over again: rapid growth, bust and stagnation. In general, after gaining momentum for decades, the economy peaked in the 1990s and never made it up. In other words, despite economic growth, the economy should be richer. In case the central bank will not be able to keep inflation rising, consumer will face a serious problem– prices and wages will fall so fast that consumers will not be able to pay back their loans, that do not fall. As a result, it can lead to a mass bankruptcy and record-high unemployment.

It took almost 15 years for the economy to wake up. Shinzo Abe has already made a pickup in inflation a priority. While his measures are boosting growth, inflation and stocks, it may be not enough. Abenomics have added around 1% to 2013 growth and it is definitely a good start. The Japanese economy may find itself in something, what Paul Krugman calls the timidity trap– when policymakers have right ideas in principle, but the timidity makes all effort useless and even intensifying earlier problems. In case the BoJ wants to avoid it, it should intervene markets without waiting for a time, when tax hike’s effect feed through the economy.

NZD

"The Reserve Bank expects to tighten monetary policy substantially over the next two years in response to emerging inflation risks”

-RBNZ Deputy Governor Grant Spencer

The NZD/USD currency pair retreated from its multi-year high on Friday, as kiwi took a break from the recent rally; however, the outlook is still bullish as the currency continues trading higher on further rate hike speculation and fears of Chinese government action. The New Zealand Dollar’s index soared to its all-time high last week. The pair moved above 0.86 level, that was previously reached in April 2013 before the central bank intervened and knocked the exchange rate sharply. Other crosses with the kiwi hit its multi-year highs as well, with NZD/JPY trading at the highest since 2007, while versus the Euro kiwi soared to its 2013 peak. The main reason for such a solid performance is the fact investors have already started to price in upcoming rate hikes, after RBNZ Deputy Governor Grant Spencer claimed the monetary policy tightening cycle can be more accentuated. He also pledged to remove limits on low-deposit home loans as soon as the property market pressures have moderated. Another fact that is adding more pressure on the central bank is the Christchurch rebuild, which is pushing the inflation rate higher. Spencer also mentioned that the nation’s exporters have adjusted to the stronger currency. The kiwi has also received a leg up after a positive trade balance, while speculations the People Bank of China will pull the trigger soon also kept market sentiment in the positive territory. This week, due to a lack of fundamental news from New Zealand, the currency can lose some of its earlier gains.