Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Zero-interest-rates will, however, not produce a single euro in additional lending, and this inefficiency will in the long term among other things further undermine the ECB reputation”

- Juergen Stark, ECB chief economist

Mario Draghi, the European Central Bank President, has finally announced that the bank intention to embark on a form of quantitative easing through the purchase of private sector credit, including asset-backed securities and covered bonds, along with a new cut in interest rates. The policy decision came after the annual inflation rate in Euro bloc fell to the lowest level in five years of 0.3%, well below the ECB’s 2% target, while the unemployment rates in Italy, Spain, France and Greece remain in the double digits. Although the long-term asset purchase programme and additional rate cut has been opposed by the German Bundesbank chief Jens Weidmann, the important question is how effective the recently announced bank’s plans will be, particularly taking into account lack of pro-growth structural reforms that Mario Draghi reiterated were missing from Eurozone governments.

Critics came immediately after the announcement with former ECB chief economist Juergen Stark saying that the central banks is turning into a European “bad bank” and its record-low interest rates will not promote lending in the Euro zone. In contrast, ECB Executive Board member Sabine Lautenschlaeger said that the asset-backed securities market in the Euro bloc is big enough for the ECB’s planned ABS buying programme to have an impact on bank lending.

USD

“While the recent improvement in the JOLTS data is nice, we should also note that other more timely labor market indicators (including payrolls and initial claims) have softened between July and August”

- Daniel Silver, economist at JP Morgan

The number of U.S. job openings remained near the highest level in 13 years in July, while hiring increased to the fastest pace in almost seven years, adding to further evidence that the job market is slowly recovering and showing companies in the U.S. will probably pick up the pace of hiring after last month’s slowdown. The number of vacant positions declined slightly by 2,000 to 4.67 million in July, down from 4.68 million in the preceding month. The drop was caused by a drop in government job postings, whereas businesses advertised slightly more jobs. Total hiring, meanwhile, jumped 81,000 to 4.87 million, the highest since December 2007, when the Great Recession began. Still, that is below the pre-recession average of just over 5 million hires a month.

The data suggests the job market is still making progress, despite last week's unexpectedly disappointing employment figures. Although U.S. jobless rate declined to 6.1% from 6.2%, the report revealed that employers added 142,000 jobs in August, the fewest since December. Job openings have soared 22% in the past 12 months, a sign that employers are confident enough in the nation’s economy to increase staffing. Net job gains have also increased strongly, with employers adding more than 200,000 jobs a month for six straight months through July, the best such stretch in eight years. However, overall hiring, has not risen as fast as openings. Hiring has been up just 8% in the past 12 months.

GBP

“July's industrial production and trade figures provide tentative indications that the UK's strong and stable economic recovery continued into the third quarter”

- Jonathan Loynes, the chief European economist at Capital Economics

Manufacturing output in Britain increased in line with analysts’ predictions in July, while industrial production overshot forecasts. In a report, the U.K. Office for National Statistics said that manufacturing production inched up by a seasonally adjusted 0.3% in July, meeting expectations. On an annualized basis, manufacturing production rose 2.2% in July, in line with expectations, after surging at a rate of 1.9% in the previous month. The report also showed that industrial production soared by a seasonally adjusted 1.7% in July, compared with forecasts for a 1.3% advance, after rising 1.2% in June. The data, released by the Office of National Statistics, suggests that the Britain’s economic recovery, which resulted in second quarter growth of 0.8%, is likely to spread into the second half of the year.

The ONS has also published its U.K. trade statistics for July, which showed the country’s trade deficit widened again in July, with the deficit of goods at its widest in more than two years, highlighting how the recovery remains rooted in the domestic economy. The trade in goods deficit rose to 10.2 billion pounds from 9.4 billion pounds in June, disappointing City expectations that the deficit would narrow to 9.1 billion pounds. The country's exports grew slightly, up 0.5 billion pounds to 24 billion pounds, with goods shipped to the struggling Eurozone increasing by less than 0.1 billion, while imports rose to 34.2 billion pounds.

AUD

“At this level, business conditions are still well up on 2013, but are significantly lower than the pre-global financial crisis years and slightly below the long run average of the series [of] plus 5 points since 1997, suggesting the moderate economic growth environment is set to continue”

- Alan Oster, NAB chief economist

Business conditions and confidence in Australia eased slightly in August following the sharp surge in July, but remained still high, mainly due to optimism in the construction sector. National Australia Bank's survey of more than 400 firms showed business confidence declined to 8 points down from July’s reading of 10, remaining robust by historical standards, though. Index of business conditions halved to +4 in August, after the 5-point rise in July. The weaker business survey data suggests the country’s economic growth environment will remain muted this financial year as mining investment fades after the end of a decade-long boom boosted by China's demand for raw materials. National Australia Bank revised downwards its fiscal 2014-2015 growth outlook to 2.9% versus 3.1% previously forecast, while revising its fiscal 2015-2016 forecast upward to 3.4% from 3.2%. The Reserve Bank of Australia has kept interest rates at a historic low 2.5% for the past 13 months to stimulate domestic demand.

Separately, Australian Bureau of Statistics showed that number of new home loans granted in Australia rose less-than-expected to a seasonally adjusted 0.3% in July, from 0.1% in the preceding month whose figure was revised down from 0.2%. That missed economists’ forecasts for a gain of 1.0%, and down from the downwardly revised 0.1% climb in June.

JPY

“Members expressed the recognition that, even though monthly figures for the CPI tended to draw attention in terms of the BOJ's conduct of monetary policy, it was important to accurately gauge the underlying trend in prices"

- BoJ minutes

Minutes of the latest Bank of Japan meeting revealed that policy makers expect the nation’s economy to continue its moderate recovery, with the inflation expectations rising as the country continues to combat the deflationary pressures, which have plagued it for more than a decade. Bank of Japan board members at the meeting said that policymakers should focus on the underlying trend in prices, and not just on the monthly moves that market players are keying on, as officials assess whether 2% inflation goal is reachable by 2015. Also, board members said that Japan's exports could be slow to react to developments in overseas economies due to structural changes, such as a shift in production overseas. Members agreed that exports had been weak recently, but exports are likely to recover as overseas economies grow. All in all, minutes offered little clues as to whether the bank intended to further its programme of quantitative and qualitative easing (QQE). The BoJ said it would continue to increase the money supply at the rate of 60-70 trillion yen per year, and would continue with QQE as long as necessary to achieve the price stability target of 2% in a stable manner, adding that the programme had been providing its intended effects.

Meanwhile, Japanese consumer confidence deteriorated for the first time in four months in August, with the sentiment index falling to 41.2, down from 41.5 a month earlier.