Daily Forex Fundamental Overview

Fundamental Analysis

Overview of the previous week’s most influential economic events

Investors all around the world were eyeing the ECB to find out whether the central bank would fall for calls to launch large-scale asset purchases, also known as quantitative easing, to defy mounting deflation threats and revive the flagging Euro zone economy. Instead, Mario Draghi, the ECB President, announced another rate cut, slashing its benchmark interest rates to 0.05% and the deposit rate to –0.2%. On top of that, the central bank announced a new stimulus programme, which will buy debt products from banks to make credit cheaper, boosting investment and growth at a time when the 18-nation economy has stalled. The scheme is somewhat different from the stimulus programme undertaken by the Fed, which includes large-scale purchases of government bonds. Nevertheless, during the press conference the ECB Chief Mario Draghi admitted that an option of launching QE was discusses during the board meeting, but the comfortable majority decided to opt out this time. Still, the announcement moved markets. The Euro weakened versus the U.S. Dollar, falling to $1.2995, the first time below the 1.30-mark since July 2013.

Meanwhile, all other major central banks including the Bank of Japan, Bank of England and Bank of Canada kept their monetary policy intact. The Bank of Japan kept its ultra-easy monetary policy unchanged and maintained its optimistic outlook of the economy despite a contraction in the second quarter that underlined the damage caused by an April sales tax hike, signalling confidence that it will be able to meet the 2% inflation target without additional stimulus measures. Moreover, BoJ Governor Haruhiko Kuroda called for the government to proceed with another sales tax lift to fix its finances. Reserve Bank of Australia Governor Glenn Stevens also kept interest rates on hold to prevent fueling house price increase in an attempt to reduce unemployment faster, which jumped to a 12-year high in July, and warned about the creation of asset bubbles in the current low-interest rate environment. Nevertheless, Stevens believes that the non-mining economy is slowly gaining a stable footing.

The Bank of England's rate-setting body voted to keep its asset purchase target as well as interest rates untouched at the record low of 0.5%, despite increasing calls by some policy makers for a change in the policy. Investors will have to wait almost two weeks to find out if any more policymakers voted in favour of raising interest rates, after two of the nine MPC members broke ranks in August.

This week’s the most influential events are going to be Mark Carney’s and Haruhiko Kuroda’s speeches, as well as RBNZ monetary policy statement. On September 10 Inflation Report Hearings will take place, which might also drop subtle clues regarding future BoE’s monetary policy.

EUR

"While there has been a lot of uncertainty, German industry is generally good”

- Evelyn Herrmann, European economist at BNP Paribas SA

The Euro zone economy remained stagnant in the second quarter, as pickup in consumer spending and exports were offset by drops in investment spending and inventories coupled with an unusual large decline in construction. Eurostat confirmed its initial estimate of the economic activity in the June’s quarter, which booked zero growth in output from the previous three-month period. That marked the second consecutive quarter of slowdown for the Euro bloc, and was a key factor behind the ECB’s decision to provide additional stimulus to boost growth and inflation at its recent meeting. The Euro zone has been posting a mild quarterly growth steadily since the second quarter of 2013, when the region emerged from a painful recession over a year long. Over the same period a year ago, the economy's GDP added 0.3%. On an annual basis, the currency bloc posted a 0.7% increase on a seasonally adjusted basis, down from the 1.0% rise recorded in the first three months of the year.

However, some positive news came from Germany, where industrial output recorded its strongest performance in more than two years. German industrial production rose 1.9% from the June’s reading of 0.4%, signalling that Europe’s number one economy is headed for a third-quarter rebound. Economists, however, had forecasted a climb of 0.5%.

USD

“In the coming quarters, we should see some slowing”

- Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

The U.S. labour market unexpectedly recorded the slowest employment growth in eight months, while the nation’s jobless rate declined, meeting analysts’ expectations. Non-farm payrolls rose 142,000 in August, missing market forecasts of 230,000, and after the gain of 212,000 a month earlier. Moreover, June and July data were revised downwards to show 28,000 fewer jobs created than previously reported. The surprise slowdown in job growth contrasts with other labour market indicators such as initial applications for unemployment claims, which are hovering near their pre-recession levels. In addition, manufacturing and service sector surveys showed strong employment growth in August and household perception of the labour market brightened significantly. The data lessens the likelihood of the Federal Reserve raising interest rates towards the end of the first quarter rather than in the middle of next year.

The jobless rate did tick down to 6.1% last month amid a drop in the percentage of people working or trying to find work. The participation rate, which indicates the share of working-age people in the labour force, decreased to 62.8%, matching the lowest since 1978, from 62.95 a month before. The underemployment rate, which includes part-time workers who would prefer a full-time position and people who want to work but have given up looking for, dropped to 12% from 12.2%.

GBP

“Jobs are still being offered, and are still sought after, but today’s figures show that permanent and temporary placements have eased in recent weeks.”

- Bernard Brown, partner and head of business services at KPMG

The British job market saw demand for staff rising at the fastest pace since April 1998 in August as pay growth continued to increase strongly, driven by employee shortages, according to the Report on Jobs by the Recruitment and Employment Confederation (REC) and KPMG. The survey revealed that both the private and public sectors saw elevated demand for employees, with the former recording the sharper growth. As to the earnings, the REC said permanent wages kept growing at a robust rate in August with the latest increase in wage growth coming in only slightly slower than June's survey-record.

Meanwhile, half of all Britons expect interest rates to increase over the next 12 months, according to a Bank of England survey. The bank's poll showed 49% of respondents expected policy makers to begin rising rates from a historic low of 0.5% within a year, compared to 42% in May. This is the highest proportion since May 2011, when the economy was showing signs of recovery and three policymakers were voting to raise rates to keep a cap on inflation. The survey also showed inflation expectations were rising up. Households believe prices will increase by 2.8% over the coming year, up from 2.6% three months ago and the current inflation rate of 1.6%. For the next two years, inflation expectations, as measured by CPI rose to 2.8% from 2.5% in May, while inflation expectations five years from now advanced to 3.4% from 2.9% in May.

JPY

“Growth this year will be less than what policymakers are expecting. The BOJ will ease policy in April because inflation will be too low to meet its target"

- Takuji Aida, chief economist at Societe Generale Securities

While the majority of economists expected a substantial slowdown in the Japanese economy in the second quarter, contraction appeared to be even more severe than projected. Revised data showed that the world’s third biggest economy shrank an annualized 7.1% in April-June period from the previous quarter, adding to concerns that damage from the April sales tax hike may have been greater than estimated. The revised contraction contrasted the initial estimate of 6.8% and was the biggest since January-March 2009, when the global financial crisis undermined Japan's export sector and factory production, keeping policymakers under pressure to expand fiscal and monetary stimulus in case the nation’s economy is not able to recover from the disruption of the April tax hike. On a quarterly basis the economy contracted 1.8%, wider than an initial reading of 1.7%. The hit from the sales tax increase extended into the current quarter, with retail sales and household spending falling in July. The government signalled last week that it stands ready to boost stimulus to help weather a second stage of the levy scheduled for October 2015.

A separate report showed Japan’s current account surplus narrowed 31% on year in July to 416.7 billion yen, according to Ministry of Finance, missing the median forecast of a 444.2 billion yen surplus.

CAD

"The Bank is comfortable with the level of accommodation and the signalling as they currently are”

- Jimmy Jean, Economic Strategist at Desjardins Capital Markets

Canada’s employment declined slightly in August, with private sector jobs recording the biggest drop and self-employment hitting the highest level on record. The Canadian economy shed a net 11,000 jobs in August following the previous month’s gain of 42,000. Economists, however, expected a gain of 10,000 jobs. Canada cut 111,800 private-sector jobs, the largest one-month decrease on record for this category. This was compensated slightly by a 14,000 gain in public-sector payrolls, and a surge of 86,900 among the ranks of the self-employed. Nevertheless, the unemployment rate remained unchanged in August at 7%.

Employment gains in Canada have slowed in recent years, after a strong performance following the end of the 2008-2009 recession. The slow pace of hiring indicates the relatively large amount of spare capacity, or slack, in the Canadian economy, urging the Bank of Canada to maintain a neutral-rate policy. The central bank said in a rate decision last week that export growth is starting to accelerate but that more is needed before firms consider boosting hiring. Canada's participation rate, or the percentage of the working-age population either working or looking for work, declined in August to 66%, the lowest level since November 2001. The August employment report indicated 20,800 people dropped out of the labour force.