Daily Forex Fundamental Overview

Fundamental Analysis

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

Over the last week markets were more active that 5 days earlier, with the market volatility entering the turbulence zone for 27% of the time, versus 22% a week ago. However, volatility of all 11 major currency pairs was distributed more evenly than earlier this month. At the same time, the Aussie gained 1.17% on the back of Glenn Stevens’ comments, while the second South Pacific currency, the Kiwi, posted the most significant drop that equalled 0.83%, as the RBNZ signalled it will take a pause in the coming months and will not raise the OCR further. The Kiwi extended its decline later, as business confidence slipped on higher rates and stronger exchange rate.

While last week the AUD/USD currency pair was the most volatile (volatility index reached 4.8– more than double the maximum level reached by market volatility), this week it will be all about the most traded currency couple. During the first two days the EUR/USD pair will be driven by events from the U.S., with pending home sales and consumer confidence expected to provide mixed signals. A day later, Destatis will unveil German CPI for the month of July. The indicator is expected to deteriorate both on a monthly and yearly basis, meaning ECB action failed to boost consumer prices so far. Keeping in mind Germany accounts for the majority of overall economic activity in the 18-nation bloc, Thursday’s Eurozone inflation data is also unlikely to surprise markets to the upside. It will be also worth mentioning that the shared currency is losing its link with the bond market, as the correlation between Euro's performance and the yield spreads of Spain, Italy and Portugal is already moving to zero. Dealers in the EUR/USD currency pair have expressed their concerns that the pair is influenced only by the events from the world's largest economy. That is why this week’s main attention grabber will be GDP report from the Bureau of Economic Analysis, which will either bolster the case for the Fed to consider a rate hike sooner than expected either will raise concerns about economy’s ability to meet its growth target. Currently the consensus forecast stands for a 3.1% growth in the second quarter, meaning the world’s largest economy almost stalled in the first half of the year. GDP report will be the final set of data ahead of the FOMC meeting. Currently everything speaks in favour of EUR/USD weakening this week, with the potential target for short traders located at 1.3404/00, represented by weekly S2 and strong psychological level. At the same time, a move above weekly S1 at 1.3467 will put weekly pivot at 1.3554 on the map.

EUR

“The Markit PMI suggests upside surprise potential, however, as does the recent German World Cup victory, which just might have prompted some atypical consumer exuberance - and if so the euro zone periphery will - footballing pride aside - be wishing Germany could win the World Cup every month.”

- Rabobank

Despite the fact the most traded currency pair closed on Wednesday and Thursday unchanged, it was stuck at the lowest level in eight months on Friday, trading around 1.3449.

The Munich-based institute said the headline business confidence index, which is based on opinion of about 7,000 German executives, came in at 108.0 in the seventh month of 2014, missing market’s forecasts of 109.4 and deteriorating from June’s 109.7. At the same time, the measure of current conditions slipped as well, hitting 112.9 points after June’s 114.8 and also falling short of analysts’ expectations 114.5. Both readings came as a surprise for experts, as a variety of economic indicators pointed at a stronger growth in recent months, while consumers also showed atypical exuberance despite the fact Germany won the World Cup.

Data from Europe is having less and less impact on the single currency, with the most traded currency pair being mostly driven by events from the United States. This week on Wednesday Destatis will publish its inflation data for July, however, even in case of weaker-than-expected data, markets will react in a meagre way, as investors lost their faith in the ECB, with bets for any additional easing being around record-low.

USD

“If we would start to see a broad-based slowdown, that would be concerning. As the economy accelerates more quickly, that will be reflected in the durable goods data.” The data “is extremely volatile.”

- Gennadiy Goldberg, U.S. strategist at TD Securities USA LLC

It seems that the EUR/USD currency pair found a strong support around a recent low at 1.3431, as even despite stronger-than-expected data from the United States was not able to provide a massive boost to the most traded currency pair. After touching a recent low immediately after the release of the data, the pair bounced back and was trading around 1.3440.

The number of orders for long-lasting goods is a good proxy of manufacturers’ confidence about the future performance of the domestic economy. Moreover, rising purchase orders is pointing at stronger activity in the coming months, as companies will increase activity to meet the demand. Bookings for non-military capital goods stripping out aircraft inched higher 1.4% following a 1.2% drop in the previous month that was downwardly revised from a 0.7% gain. The Commerce Department also said that demand for all durable goods climbed 0.7% in June. Despite the fact the indicator is highly volatile, stronger-than-expected reading suggests GDP will strengthen as well, meaning the Fed will have a support in economic data to start raising interest rates. The U.S. economy will probably expand at a 3.1% annualized pace this quarter, after a 3.3% growth in the second quarter. These figures come after a 2.9% contraction in the first three months, the worst performance since the depth of the recession.

GBP

“There’s clear momentum behind the economy and there’s nothing obvious out there that suggests a sudden slowdown in the next few months,”

- Peter Dixon, an economist at Commerzbank AG

The cable was expected to perform an impressive rally on Friday, as GDP report was projected to show the economy is now the fastest growing economy among other G7 members. The report, however, was not able to surprise markets to the upside, hence, market reaction was muted. On the back of disappointing statistics from Germany, the cable slid to 1.6976, while the reaction on the U.K. GDP report was short-lived, with the pair first rising to 1.6992, however, a couple of minutes later the pair eased back to 1.6965.

The ONS said the economy grew 0.8% in the second quarter, following the same expansion three months ago. On a yearly basis, growth accelerated to 3.1%, also matching estimates. The main upside pressure came from a robust growth in the key services sector, which accounts for 78% of total economic output. Activity in the sector expanded 1%, posting the strongest growth since the third quarter of 2012. The GDP, however, still will be revised, as first estimate is based only on less than 50% of all the data and covers figures from only first two months of the second quarter. Keeping in mind that construction activity jumped 1% in June, while services and manufacturing gained 0.2% and 0.4% respectively, the upside revision of the economic output is widely expected.

JPY

“Exports are weak and household spending - hit by the April sales tax hike - won't bounce back so strongly, which means the economy lacks a strong driver ahead,”

- Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute

The Bank of Japan has been showing surprising resilience since April, when the sales tax was increased to 8%. During the last several months the data was sending promising signs, providing a support for the central bank, which was confident about reaching its 2% inflation target without any additional measures. Nevertheless, weaker inflation for June can hamper its optimism.

The national core measure of inflation eased to 3.3% in June, following a 3.4% increase a month earlier, Japan’s Statistics Bureau said on Friday. The broader measure of consumer prices, which does not exclude volatile fresh fruit prices, was seen sliding to 3.6% on an annual basis from 3.7% in May. That was the second straight month of slowing inflation, as a jump in energy costs lost steam, while consumption boost from the tax hike was waning as well. While a slowdown was widely expected by analysts, debates will continue over whether the central bank is overoptimistic about reaching its own ambitious target next fiscal year.

While consumer prices have been constantly rising over the last year, officials and experts have stopped short of declaring an end to a decade-long deflation, saying that growth is still fragile. Domestic consumption shows no convincing signs of a stable recovery amid falling real wages, while shipments remain sluggish, with the business investment being the only bright spot for the BoJ.

NZD

“There are material headwinds remaining for the economy (a high NZD, a frail household savings rate) that stymie the potential for that feel-good factor to manifest into reality in its entirety,”

- Cameron Bagrie ANZ chief economist

Last Thursday, following RBNZ’s meeting the Kiwi plunged most in nine months, with the corresponding index falling 0.9% against 16 major currencies. A day later a report from the ANZ showed confidence among New Zealand companies slipped in July, however, it was widely anticipated, thus, market reaction was muted. The NZD/USD currency pair found a strong support at 0.8559, while the fact a slight majority of pending orders placed to buy the Kiwi versus the Buck is suggesting traders are still betting on a rebound.

New Zealand companies facing higher borrowing costs and a stubbornly high exchange rate of the domestic currency. This is all a result of the RBNZ tightening process that started earlier this year and is still far from the end despite the central bank decision to take a pause. That was not a surprise that the ANZ Business Outlook survey showed that a net 39.7% of companies were still optimistic in July, while the reading is down from June’s 43%. Moreover, this is the fourth straight monthly drop following a 20-year peak of 71% registered in February. Stronger inflationary pressure has led the central bank to raise its official cash rate four times since March, bringing the OCR to 3.50%. The RBNZ maintains that higher rates will guarantee a more balanced and sustained economic recovery. Nevertheless, keeping in mind the recent RBNZ meeting, confidence among companies is likely to strengthen in the coming months.