Fundamental Analysis
EUR
“Germany has experienced a slight dent in economic activity recently -- retail sales declined and industrial production as well as incoming orders dropped”
- Clemens Fuest, ZEW President
The single currency slipped sharply lower following the release of German ZEW investor sentiment. Investors in Europe’s number one economy remained sceptical on German economic prospects, with the influential ZEW index falling 2.7 points to 27.1 in July, recording the seventh consecutive drop. The gauge hit the lowest level since December 2012, was also below the long-term medium of 24.7 and against market consensus for a reading of 28. A separate gauge of current conditions fell to 61.8 from 67.7 in June, undershooting expectations. The survey results, which were derived from responses of around 240 analysts and institutional investors, show that investors and business leaders are lukewarm about both the current and long-term climate of the German economy. A frequent criticism of the ZEW index is that it can be volatile and is, therefore, not particularly reliable. Nevertheless, the Euro weakened to a one-week low versus the U.S. Dollar, falling to $1.3587. The shared currency also lost 0.1% versus the Japanese Yen to trade at 138, and it was down 0.5% against the Pound, with the Sterling receiving boost from better-than-expected U.K. CPI data.
Meanwhile, the Euro zone’s economic sentiment plunged 10.3 points to 48.1 in July; likewise, the current conditions declined 3.8 points to –31.5.
USD
“Too many Americans remain unemployed, inflation remains below our longer-run objective and not all of the necessary financial reform initiatives have been completed”
- Janet Yellen, Fed Chair
Federal Reserve Head Janet Yellen reiterated her pledge to keep interest rates low, but added that in case the labour market continues strengthening there might be earlier-than-planned rate hikes. Yellen also said that economic recovery remained incomplete, expressing disappointment in housing market as mortgage rates have edged higher, and stressing that the Fed’s help was necessary. In addition, the Fed Chairwoman noted that there were signs of production and spending improvement in the second quarter. Moreover, she played down concerns over health of the financial markets despite acknowledging signs of bubbles in some areas, including stocks of social media and technology companies. Yellen generally dismissed calls that the U.S. central bank has caused dangers.
Meanwhile, U.S. retail sales rose less than initially was expected, adding to evidence that consumers remain cautious despite sturdy job gains this year. Retail sales inched higher 0.2% in June, the Commerce Department said Tuesday, holding back by a sharp decline at building and garden supply stores, as well as at restaurants and automobile dealers. Economists, however, expected retail sales, which account for a third of consumer spending, to rise 0.6% following the May’s gain of 0.3%.
GBP
"If we see inflation at this level or edging up over the next couple of months then that might be a green light to the hawks at the BOE to start voting for a rate increase”
- Philip Shaw, chief economist at Investec Securities Ltd.
U.K. inflation rose more than expected in June to its fastest pace since January, driven by clothing, food and air fares, reinforcing the view that a rise in interest rates may be getting closer. Annual rate of inflation accelerated 1.9% up from 1.5% in May, the Office for National Statistics said, overshooting analysts’ expectations for a 1.6% rise. The pickup takes the annual rate of inflation closer to the central bank’s 2% target. Annual inflation has now been at or below 2% for seven consecutive months, the longest streak of near-target price gains since 2005, helping the Bank of England to postpone raising interest rates despite U.K.’s surprisingly robust economic recovery. Core CPI, which excludes energy, food, alcohol and tobacco, rose by 2.0% in June compared with the same month last year. The Pound strengthened, gaining more than 0.3% immediately after the release of data to trade at $1.7142.
There is evidence that the increase in inflation in June may prove to be temporary. Inflationary pressures elsewhere are weak: wage growth is subdued and prices charged by companies at the factory gate inched higher just 0.2% on the year in June, the slowest pace of annual producer-price inflation since October 2009. The prices companies pay for raw materials dropped 4.4% on the year, ONS data reveals.
NZD
“It looks like a justified reaction based on the headline CPI reading coming in a little bit softer than expected”
- Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd.
The New Zealand Dollar weakened the most in seven weeks after consumer price index rose less than expected and a gauge of dairy prices decline to the lowest level since 2012. The local currency slumped against all of its major counterparts on speculation the Reserve Bank of New Zealand might postpone hiking interest rates. The kiwi lost as much as 0.7% to 87.06 U.S. cents, the biggest drop since May 28. New Zealand inflation remained surprisingly contained, with consumer prices rising 1.6% in the three months through June compared to the same period last year. Analysts, however, expected a 1.8% increase. Prices of imported goods were the main downward contributor to the annual change of inflation. On a quarterly basis, CPI rose 0.3% unchanged from the previous three-month period.
Nevertheless, the RBNZ would be pleasantly surprised by CPI’s result, as low inflation and strong growth are what central bankers pursue. The nation’s central bank’s main concern is keeping domestic inflation pressures controlled, as accelerating inflation reflects the New Zealand economy growing beyond its potential. In response to the booming economy, the RBNZ has already increased its cash rate by 75 basis points this year, the first central bank in the developed world to do so, and it is expected the central bank will continue lifting rates this year.
CHF
“The SNB is likely to continue to enforce the minimum exchange rate with utmost determination as long as needed”
- Gero Jung, chief economist at Mirabaud Asset Management
The Swiss National Bank is expected to keep the Franc’s cap into 2016 as the Euro zone policy makers’ attempts to boost inflation weigh on the Swiss currency. The ECB President Mario Draghi move to fuel growth and inflation in the 18-nation bloc with the help of negative deposit rate and a lending programme could spur demand for the Franc. The SNB capped the Franc at 1.20 per Euro around three years ago to combat the risk of deflation and a recession as investors turned to the Franc as a refuge amid the Euro zone’s debt crisis. Given the consumer prices growth is set to stagnate this year, rising to just 0.4% in 2015, President Thomas Jordan reiterated that the cap remains the main policy tool in the foreseeable future. The Swiss Franc gained as much as 0.5% against the single currency last month. It traded at 1.2152 versus the Euro zone’s currency yesterday.
Moreover, another challenge the SNB officials may face is growth risks stemming from the government’s new quotas on immigration fro European Union citizens. Majority of economists believe the move might hurt growth. The new system, which the government intends to implement from 2017, is a response to a national referendum in February in favour of measures to halt mass immigration. The change has to be passed by the parliament and could face another country-wide vote.
This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.
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