Daily Forex Fundamental Overview

Fundamental Analysis

Monetary policy divergence of leading central banks is getting wider

The divergence in monetary policy of central banks is getting wider, as some central banks are about to start normalizing their monetary policy, others keep the policy intact or even embark on further stimulus measures to revive growth.

Mark Carney, the Bank of England Governor, hinted that the central bank may start raising interest rates next spring if the labour market continues to perform strongly. Carney said that if rates started to increase in spring 2015, inflation would be set to settle around the BoE's 2% goal in three years' time. Majority of investors expect the BOE to raise its benchmark interest rate from a 320-year low of 0.5% in the first quarter of 2015, but Carney stressed there was no concrete timetable.

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. As widely expected the Bank of Japan kept its ultra-easy monetary policy unchanged and maintained its optimistic outlook of the economy despite a bigger than initially thought contraction in the second quarter. USD/JPY is approaching the supply area formed by the weekly and monthly R3 levels, which can throw the price back to 106. However, considering that on the weekly and monthly time-frames the indicators are mostly giving ‘buy' signals, the medium-term outlook will remain bullish as long as the up-trend at 105.50 is intact. Otherwise the bears may exploit a good opportunity to push the Dollar down to the July high 103.

The Reserve Bank of New Zealand has decided to keep rates unchanged and soften its stance on future rate hikes as it revised inflation outlook and reiterated that the nation's currency is too strong, sending the New Zealand Dollar to a seven-month low. Currently the official cash rate stands at 3.5%, which is among the highest in the developed world. The central bank said the New Zealand Dollar is likely to depreciate significantly at some point, especially as the U.S. starts to normalize its own interest rates.

In the Meantime, Mario Draghi, the European Central Bank President, has finally announced the bank’s intention to embark on a form of quantitative QE through purchase of private sector credit, including asset-backed securities and covered bonds, along with a new cut in interest rates. The important question now is how effective the 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.

EUR

“Today's production figures clearly raise hopes that the eurozone economy will return to positive growth in the third quarter after Q2's (second quarter) flat GDP reading"

- Martin van Vliet, an analyst at ING Bank

Industrial production in the Euro zone increase twice as much as anticipated in July, halting a two month streak of contraction and fuelling hopes that the region may start growing again in the third quarter, after recording no growth in the previous three months. Output from factories, energy companies and other utilities across the Euro zone grew 1.0% on a monthly and seasonally adjusted basis, following the 0.3% decline in June and overshooting analysts’ expectations for a 0.7% pickup. On an annual basis, the industrial output increased as much as 2.2% in July, up from the upwardly revised 0.2% growth registered in the prior month and versus the market consensus for a 1.4% growth. Production remained above contraction territory for the eleventh straight month. The jump in output was led by manufacturers of capital goods, which may suggest that investment spending is set to rise, a welcome sign after years of caution on the part of European businesses. Energy production declined, as did the manufacturing of durable consumer goods, an indication that households remain wary of making large purchases in the face of an jobless rate that remains close to its record high.

However, employment and industrial production remain well below their pre-crisis levels and there is no indication that the Euro zone's recovery is set to accelerate to a pace that would quickly add large numbers of new jobs or end a long period of low inflation.

USD

“We are looking at solid economic growth in the third quarter”

- Gus Faucher, an economist at PNC Financial Services Group Inc.

Retail sales in the U.S. rose at the fastest pace in four months in August, a sign that job growth in recent months has boosted consumer spending. Retail and food sales rose 0.6% from July to a seasonally adjusted $444.4 billion, according to the Commerce Department. Excluding automotive purchases, sales picked up 0.3% from July, while stripping out both autos and gasoline, sales rose as much as 0.5% in August. The data suggests that Americans' reluctance to spend has faded somewhat, even though their wages have yet to increase by much. The advance in retail sales could boost overall economic growth following an uneven first half of the year as consumer spending accounts for 70% of the economic activity. Economists expect the world’s number one economy to grow at a 3% annual rate in the rest of the year. The economy expanded at a 4.2% rate during the second quarter after contracting at a 2.1% rate during the first quarter, according to the Commerce Department.

Separately, the U.S consumer confidence rose to the highest level in 14 months in September, as household’s economic outlook brightened. The Thomson Reuters/University of Michigan preliminary consumer sentiment index increased to 84.6, the highest gauge since July 2013, from 82.5 the month before. Ongoing improvement in the labour market, gains in stock portfolios and a drop in gasoline prices have underpinned household confidence in recent months.

GBP

“Prospects still look relatively healthy for house building even if the growth rate will struggle to match the heady level seen earlier this year"

- Howard Archer, an economist at IHS Global Insight

Output in the U.K.’s construction sector, which accounts for around 6.3% of total gross domestic product, was flat in July from the previous month, resulting in a decline of the annual growth rate to the lowest level in eight months as an expansion in private house building began to level off. Construction output rose an annualized 2.6% down from a three-month high of 5.3% recorded in June. However, orders for new work advanced at the fastest rate in a year, leaving analysts confident that the coming months would bring robust growth, particularly as private-sector data released earlier have also indicated an ongoing strength. The construction sector was severely impacted by the financial crisis but has been recovering since last year along with the broader economy, supported by falling unemployment and strong consumer and business confidence. A separate survey conducted by Markit recently showed Britain's construction industry expanded at its fastest pace in seven months in August, prompting job creation but also putting strain on suppliers. The latest government data on housing starts also suggest the construction sector stays on solid footing as more housing starts help the sector increase its output. The latest data showed there were 36,000 new housing starts in England during the three months ended June an increase of 18% on the same quarter last year. Still, economists argue the number remains significantly below the current demand on the property market, driving house prices strongly upward.

CNY

“An obvious drop was seen in the industrial output growth for August"

- Jiang Yuan, a senior analyst with the NBS

China’s industrial production, which measures output at factories, workshops and mines, dropped in August on waning export demand and a slowdown in real estate development that has impaired steel and cement production, according to the National Bureau of Statistics. On an annual basis factory output declined as much as 6.9% from the previous year, compared to the July’s reading of 9%. On a monthly basis, the industrial output in August expanded by a fractional 0.2% from July. Industrial production has been weakening amid flagging exports to major markets including Japan, Europe and the United States, as well as the saturation of China's domestic markets for vehicles and mobile phones after years of robust growth. China's August export growth came in at 9.4%, significantly lower than the 14.5% rise in July. Auto production grew only 3.1%, down sharply from 10.5% in July, while cell phone production declined 2.3%. Retail sales, a key gauge of consumer spending, rose 11.9% in the same month on year, the National Bureau of Statistics said. Fixed asset investment, a measure of government spending on infrastructure, grew 16.5% on year in the first eight months of 2014.

China aims to reach a GDP growth target of around 7.5% and a consumer price index goal of about 3.5% for 2014, with 10 million more urban jobs to keep the urban unemployment rate at a maximum of 4.6%.

JPY

“However, policies reflecting diverse views tend to be more robust to subsequent changes in circumstances. In addition, they are also bound to be more effective, since they are likely to gain support from many people with different views.”

- Haruhiko Kuroda, BoJ Governor

The Governor of the Bank of Japan Haruhiko Kuroda delivered a speech at the graduation ceremony for the National Graduate Institute for Policy Studies in Tokyo Friday morning. In his speech, he stressed the importance of response to policy challenges, adding that one needs to assess the situation realistically and accurately, and the need for pragmatism. Kuroda also spoke on the issue of QQE, which he introduced last year in order to lift Japan out of its 15-year deflation. He expressed that the previous attempts of BoJ had not been sufficiently strong due to the bank's weak commitment.

In addition, the Ministry of Economy, Trade and Industry released the revised report for indices of industrial production for the month of July. The seasonally adjusted index revealed that production gained slightly and added 0.4% month-on-month, in comparison to the increase of 0.2% the month before. The rise overstepped the predicted 0.2%, signalling the economy's growth. However, compared year-on-year, the index for production lost 0.7%. Shipments added 0.7% this month, yet lost 0.1% compared to last year. Inventories gained 0.9% this month, and managed to add 2.9% year-on-year.