Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Inflation is still a story of low energy prices, low food prices and not so much yet a threat or real outright deflation.”

- ING-Diba

Inflation level in the Euro area was revised to the upside by the Eurostat. The final reading gave a 0.4% price increase in August of the current year, as it was changed from the five-year lowest level of 0.3%. However, the indicator remains far away from the European Central Bank’s target level of below, but close to 2%. Calculated without volatile products’ price changes, the CPI grew from 0.8% to 0.9% last month. Recently, the ECB announced a start of the long-awaited asset purchases program, which is due to begin working in the foreseeable future. The Central Bank will mostly purchase privately owned securities. Economists explain the low inflation level by falling energy and food prices, which eases the threat of real deflation in the single currency zone. Costs of services, however, are rising moderately. Despite Mario Draghi’s attempts to assure markets in ECB’s long-term strategy to bring the CPI to the target level, investors tend to be rather pessimistic. The five-year inflation swap rate fell to 1.94%, meaning that it will be extremely difficult for the policymakers to reach the 2% inflation, even in the medium-term.

Besides that, trade balance surplus in Italy jumped to 2.82 billion euro in July, as exports slowed down by 1.6%, while imports lost 2.5% on a monthly basis. Balance of international trade in Spain, however, declined to reach the deficit of 1.82 billion euro.

USD

“Inflation is certainly benign. The doves have the high ground on this one. They are not going to do anything with rates for a long time.”

- Societe Generale

Consumer price index in the United States declined surprisingly to 1.7% on the annual basis in August, while month-on-month prices were down 0.2%. Excluding food and energy, monthly inflation was equal to zero. Therefore, the Fed target of 2% is becoming even less realistic to reach in the nearest future. At the same time, analysts admit a negative impact of falling energy prices, as they limit the overall rise in prices. It poses some difficulties for the Federal Reserve, which held the monthly session during past two days. Among main points, the FOMC decided to taper QE even further, by cutting mortgage backed securities’ purchases to $5 billion and bond buying to $10 billion. The main interest rate was kept at 0-0.25% level. Meanwhile, Janet Yellen confirmed that very low interest rates will remain in place for a long period of time, taking into account the previously mentioned dropping inflation. Some attention was paid to the labour market, as the Fed assumes that it still has a potential to recover even more before raising interest rates.

Additionally, current account in the world’s largest economy rebounded, by posting the less-than-predicted deficit in the second quarter. It reached $98.51 billion versus $102.11 billion in January-March, while economists expected the negative gap to widen. The decrease was mainly caused by falling shortfall on secondary income, as it was the smallest since 2006 at $21.4 billion.

GBP

“The main findings of this release are that employment continued to rise and unemployment continued to fall. These changes continue the general direction of movement since late 2011/early 2012.”

- Office for National Statistics

Following the unexpected split in votes from MPC members in August, they decided to keep their opinions unchanged this month. The Bank of England’s MPC voted 2-0-7 in favour of holding the main interest rate at 0.5%, while the vote for keeping asset purchases program at 375 billion pounds level was unanimous, according to the latest meeting minutes. The main Mark Carney’s argument against changes was, as before, the wage growth. It increased to 0.6% in July from minus 0.1% a month before, including bonuses, however, remained well below the inflation level of 1.5%. As economy is supposed to advance further in upcoming quarters, the wage growth may also gain momentum in the nearest future. Meanwhile, the Bank of England expects the increase in salaries not to exceed 1.25% in 2014.

Ahead of the Scottish independence referendum, which is taking place on Thursday, good news were demonstrated by the labour market. A total number of jobless claims in the United Kingdom decreased 37,200 last month, comparing to the forecast of a 29,700 fall. Alongside, payrolls added 74,000 to hit the 30.6 million level, but part-time jobs accounted for the vast majority of an overall rise. Unemployment rate, in turn, slipped to 6.2% or 2.02 million people in three months to July, down from 6.4% in April-June. Therefore, the indicator reached its lowest point since 2008.

CHF

“New geo-political risks have emerged and international economic data, particularly from Europe and South America, has been weaker than we expected. The situation for Switzerland has clearly worsened.”

- Chairman, Swiss National Bank

Economic confidence in Switzerland declined considerably in September, falling into the negative territory for the first time since the beginning of this year. The ZEW Institute, which calculates the same indicators for Germany and Switzerland, put the latter one at minus 7.7 points this month, while just a month ago it stood at 2.5 points. The positive mark indicates a positive outlook for economy among survey participants, while the negative points on a possible fall in economic activity in the future. At the same time, the similar index from the KOF Swiss Economic Institute rose in August, meaning that the sentiment can be mixed and unclear at the moment. Besides that, an opinion on current condition of Switzerland’s economy dropped to 25.6 points in September, down from 45 points in August. On the other hand, 44% of economists predict the economy to advance within 1.5%-2% range in 2014, while the Swiss National Bank may cut its forecast soon.

Experts see increasing risks for Swiss economy amid international political issues with Russia and mutual sanctions. Switzerland, however, was one of the last countries to impose economic sanctions on Russia, as analysts broadly expected this country to keep the status-quo. The weakness may come from the Eurozone and particularly Germany, the main Swiss economic partner, and it can have a negative impact on GDP growth in the country.

NZD

“Unlike the rest of the world you’ve got very strong domestic demand. You’ve got business investment, you’ve got consumption then housing. That’s a set of numbers the rest of the world dreams of.”

- TD Securities

Current account balance of New Zealand swung into the red territory in the second quarter of this year, being that exports of dairy products and other commodities declined. The deficit reached $1.1 billion, comparing to the surplus of $1.47 billion a quarter ago. Year-on-year, the deficit grew to $5.8 billion, which accounts to 2.5% of country’s GDP. As analysts expected the current account balance to be slightly better than reported data, it raises concerns about economic perspectives of New Zealand. Moreover, last Thursday the Reserve bank of New Zealand decided to keep the main interest rate unchanged at 3.5% on fears that the economy of the country will struggle to keep momentum in the medium-term.

Economic growth in New Zealand reached 0.7% in the Q2, calculated quarter-on-quarter. On the annual basis the country’s GDP added as much as 3.9%, the largest gain in ten years. The country experienced the strongest immigration in 11 years, while the government invested funds to rebuild the earthquake-damaged Christchurch. Moreover, weakening national currency will help exports to start a recovery. Alongside, the Reserve Bank of New Zealand expects the pace of growth to decrease slightly next year, as the economy may rise 3.2% by March of 2015. When publishing its next year’s forecasts, the RBNZ underlined that interest rates will not be raised at least until the second quarter of 2015.