Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The emerging market turbulences and the cold winter in the US may have at least temporarily prevented further growth in export orders"

-Christian Schulz, senior economist at Berenberg Bank

Last week we concluded that Europe’s powerhouse is loosing momentum as during the week markets have received a series of disappointing figures. A slew of negative data continued this week, as German trade balance fell short of analysts’ forecasts.

The German statistics published the nation’s trade data for the month of February on Wednesday. Shipments from German economy plunged 1.3% in the second month of the year, following a 2.2% increase in January. At the same time, imports climbed 0.4% slowing from a 4.1% gain in the prior month. Markets were betting on a 0.5% decline and 0.1% increase, respectively. Disappointments resulted in a weaker-than-expected trade surplus, that stood at 15.7 billion euros in February, compared with 17.3 billion surplus in January and falling short of analysts’ expectations for a 17.8 billion figure. All data is seasonally adjusted. Germany has been under pressure from the European Union and IMF for its reliance on exports and for importing not enough goods and services to boost struggling economies in the 18-nation’s bloc.

It is not a question that the German economy is the star of the Eurozone, with its low unemployment, robust growth and relatively low debt level. And this week’s drop in the trade surplus, which is still at the solid level, only reinforces this fact.

USD

“They anguished over how to change the wording. This Fed doesn’t want to rock the boat. The more predictable, the better.”

- Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls

The U.S. Dollar declined further against the Euro Wednesday following the release of minutes from the Fed’s meeting in March. The shared currency gained to $1.3856 up from $1.3797, reaching the highest level since March 18.

According to the minutes, the Fed officials are concerned over low inflation rate in the U.S., as they had predicted that a strengthening U.S. economy would boost inflation from 1% towards the healthy 2% target, associated with a robust business activity. However, the harsh winter weather undermined their expectations, as it dampened economic growth in the world’s number one economy. Also, central bankers appeared to be concerned that the market could potentially overreact to the upward shift in the Fed’s expectations for short-term rates, and remained cautious about raising interest rates, with no specific schedule on plans to hike them as the nation’s economy improves. In addition, they agreed that the existing 6.5% unemployment target has become outdated and ineffective gauge to determine the timing of the first rate hike. Consequently, the officials voted to replace a specific focus on a goal of the jobless rate with a longer list of less specific objectives. In general, the majority officials on the FOMC were increasingly optimistic about the economic growth, perceiving the recent weakness as a result of bad weather only.

GBP

“Fundamentally, the UK is running a trade deficit because we do not make enough things that other countries want to buy – perhaps as a result of the many years of an overvalued exchange rate before the crisis.”

- Rob Wood, chief UK economist at Berenberg

The cable continued its appreciation on Wednesday, as the Sterling was boosted by the stronger-than-expected trade figures from the U.K. The pair is now approaching this year’s high at 1.6822, and it seems that Janet Yellen’s comments were not convincing enough to provide a substantial boost to the greenback.

The ONS said trade deficit narrowed in line with forecasts, recovering from the unforeseen sharp expansion a month earlier, when the gap more than doubled from the 34-month low posted in December. February’s trade deficit stood at 9.1 billion pounds from 9.4 billion a month earlier. Figures showed that imports plunged 2.2% to 32.6 billion, offsetting a 1.6% decline in exports, a level which is the lowest since November 2010. At the same time, imports hit their lowest since April 2011. On a quarterly basis a similar situation is seen, as both imports and exports fell 4.7% and 2.5% respectively. Last month, during the budget speech Chancellor George Osborne pointed out that combined goods exports to such countries like Brazil, India and China have risen sharply, suggesting that “many lost years will catch up”. Exports of the nation’s services remain the only sub-segment that generates a surplus and help to offset weak performance of other sectors. While trade figures were welcomed by markets, they suggest that the economy is far away from rebalancing, as current growth is boosted by a stronger demand for housing and a decline in the savings rate.

JPY

“The BOJ still has room to surprise markets again. If steps are taken little by little, investors aren’t convinced policy makers are serious. Kuroda’s method has been far more effective.”

- Kazuhiko Ogata, the chief Japan economist at Credit Agricole SA.

This week’s comments from the Bank of Japan provoked a massive sell-off of the USD/JPY, as investors rushed to buy the Yen following the BoJ meeting, where policymakers said no additional easing was on the schedule. Soon after the announcement the pair plunged from 104.12 to 101.55; however, after that the pair bounced back above 102-mark. Market sentiment is strongly bullish (71%), but further depreciation can be expected amid disappointing labour market data from the U.S. and BoJ’s confidence.

While some can be disappointed by the fact Kuroda decided not to pull the trigger during his first anniversary, his strategy proved one important fact. The Governor has shown that a single unprecedented expansion of the stimulus programme has more impact on the economy rather than a series of smaller injections and his latest decision suggests he will prove it again. Since April 2013, when Kuroda announced his stimulus programme, the Japanese Yen plunged more than 9%. On the contrary, the Yen advanced around 3% during two years when the same measure was introduced in October 2010 by the former Governor Masaaki Shirakawa. The only difference was that Shirakawa launched a smaller asset-purchase programme that was expanded seven times before the central bank decided to stick to the unlimited easing.

AUD

"The demand for labor has remained weak and, as a result, the rate of unemployment has continued to edge higher. It will probably rise a little further in the near term.”

-Glenn Stevens, RBA Governor

After retreating on Tuesday, the Australian Dollar regained strength a day later, approaching a strong resistance at 0.94. The Aussie gained 0.15% on Wednesday versus the greenback, suggesting investors’ interest in the Aussie makes room for additional appreciation during the week. The first reason behind another rally is the disappointing U.S. employment figures, while at the same time, the Aussie was pushed higher by optimistic data from the resource-rich economy.

The housing market continue inspiring the central bank, as home loans soared 2.3% in February, following a flat reading a month earlier and outpacing expectations of 1.5%. Another piece of fundamental data, that was even more important, was the report from the Westpac Banking Corporation. The company said Australian sentiment improved slightly this month, with the consumer sentiment index inching higher 0.3%, recovering from a 0.7% decline in the previous month. Despite the improvement, they continued to feel the burden of economic slowdown caused by waning investment in the mining sector, as index still remained below the mark that separates optimism from pessimism. Figures also showed that the labour market is improving, as a gauge tracking unemployment expectations fell 3.2%, while a measure of personal finance rose 6.7%.