Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Speculation about an asset-purchase program from the ECB is likely to gain further traction”

- Benjamin Schroeder, an interest-rates strategist at Commerzbank AG

This week European Central Bank’s patience will be tested once again, as key inflation data for July are on the radar. While policy makers may feel there is a room for complacency at least for this summer that would be a terrible error, as Eurozone crisis is just sleeping and it is far away from being dead. Despite some enthusiasm, economic risks are on the rise, and the recent problems of Portuguese bank Espiritu Santo is another prove of that.

Falling funding costs diminish incentives for reducing debts and implementing structural reforms. In order to increase spending and ease fiscal policy the Italian government proposed to use the benefit of lower rates, expecting around 10 billion euros over the next three years. Additionally, a weaker single currency cannot boost exports as a high proportion of trade is conducted within the Eurozone itself. Based on the U.S., Japan and U.K. experience the monetary policy cannot boost inflation significantly, reflecting the impact of deleveraging by companies, consumers and banks. While rising import costs can provide a boost to the headline inflation, the erosions of real income will likely reduce private consumption, limiting any pick--up in GDP growth. This week a report from the Eurostat is expected to show the inflation rate remained unchanged at 0.5% for a third month in July, while unemployment rate is expected to stay at 11.6% in June.

USD

“If the labour market continues to improve more quickly than anticipated . . . then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned”

- Janet Yellen, Fed chairwoman

Economists from the ING believe the world’s largest economy has bounced back in the second quarter following a dismal start to the year. While growth is expected to reach around 3.0% in the three months through June, putting the economy back on track, Friday’s report will show the economy created 225,000 in July, while unemployment rate is likely to drop to 6.0%.

This forecasts echo with forecasts the FOMC is set to stay of its earlier-chosen course with another $10 billion taper of its stimulus programme on Wednesday. Officials will also most likely tweak its language on the domestic economy in order to address bout strong payrolls growth. In case the FOMC will cut its asset-purchase programme further, it will bring monthly purchases to a $25 billion per month, on the way to reach a complete stop in October. There are practically no chances the Fed will take a pause this month, as two weeks ago the chairwoman changed her language, hinting on a sooner-than-expected rate hike in case the economy continues to perform at the same pace. While Richard Fisher of Dallas already claimed a rate hike will be made early next year, Dennis Lockhart of Atlanta is still betting on a second half of 2015. The Fed is likely to express its target interest rate as a fairly wide range, for instance, the rate can be raised in a range of 0.25% to 0.5%.

GBP

“It appears that we’ve reached a tipping point with the equilibrium between buyers and sellers much more out of sync”

- Craig McKinlay, mortgages director at Halifax

After a year of growing pressure on the government and the central bank the housing market seems to become a less worrying issue for both of them. None of them has done anything remarkable to prevent a bubble that could derail economic growth, however, there are clear indicators housing market is losing momentum. Earlier this year the Bank of England warned it posed the greater risk to the domestic economy, while financial stability officials set property lending curbs in June in order to prevent frothy prices leading to a soaring build-up of debt.

A recent report from the Rightmove showed prices sought for houses across England and Wales sank 0.8% in July, posting their first monthly decline since December. Property prices in the capital fell 0.4% reaching an average of 587,174 pounds. Additionally, the gulf between demand and supply for property in the U.K. is poised to narrow, according to a survey compiled by Halifax. The balance of people considering the next 12 months as a good time to purchase a home plummeted to 5 in the second quarter following 34 three months earlier. That was the largest drop since records began in 2011. At the same time, a gauge of future outlook climbed just 1 point to 66. These figures mean that a boom that has driven housing prices to record highs may have reached its peak.

JPY

“Weak exports alone will not prompt the Bank of Japan to ease policy, but if consumer spending also weakened, then expectations for a policy change would increase”

- Yasuo Yamamoto, senior economist at Mizuho Research Institute

Japan’s officials are getting less confident in their own assessment on exports after having erred on the side of optimisms for more than a year after launching unprecedented stimulus programme in April 2013. The re-assessment of exports outlook during the upcoming meeting on August 7-8 is almost guaranteed, especially keeping in mind slowing inflation in the fact of a higher tax burden. Japan’s shipments plunged for a second straight quarter in the three months through June, again coming as disappointment, as one of the top priorities was a boost in exports. During July’s policy meeting the BoJ said that exports have recently levelled off, while in March they lowered their exports outlook. It is still unclear whether officials will change the wording next week, however, other reports like industrial output will also have a significant impact. This indicator is a good proxy of the strength of overseas demand for goods produced in the world’s third largest economy.

Despite worrying signs from the trade sector, the central bank is confident in meeting its pledge to achieve the 2% inflation target, on the back of strong business and government spending, which both will be supporting the economy until consumption rebounds. Nevertheless, the failure of exports to rebound could discourage Japan’s manufacturers from investing, negatively affecting the growth in jobs and wages.

NZD

“It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level”

- Graeme Wheeler, RBNZ Governor

The Reserve Bank of New Zealand raised its official cash rate by another 0.25% last week, however, traders got extremely bearish on the Kiwi, with NZD/USD continue falling lower on Monday, hitting 0.8532 with more declines on the radar. The currency lost by close to a hundred pips immediately after the announcement, however, will there be any love for the Kiwi any time soon?

There are currently some arguments in favour of the central bank’s intervention to talk down the Kiwi. The RBNZ also warned that current level of the exchange rate is unjustified by economic conditions. Currency intervention will be consistent with the central bank’s Policy Target agreement, a public contract negotiated between the RBNZ and the government, which defines the price stability. Furthermore, market conditions are opportune and there is a high possibility of success, as Wheeler already claimed the currency has a potential for a sharp fall.

Analysts are pricing in odds of seeing another OCR hike in the next few months, while some do not believe there will be more action until March 2015. While short-term outlook for the currency remains bearish, sooner or later traders will be drawn back to the positive interest rate differential of buying the New Zealand Dollar versus lower-yielding currencies, meaning in a longer term perspective the currency will continue climbing higher.