Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“While industrial production and manufacturing orders in July gave some reason for optimism, more recent survey indicators have given no indication that the sharp decline registered in August has stopped.”

- Mario Draghi, ECB President

President of the Bundesbank Jens Weidmann expressed concern about effectivity of the European Central Bank’s new support measures, undertaken earlier during the previous week. In particular, he spoke about the asset purchases program, as well as planned purchases of covered bonds. According to Weidmann, considerable changes in the monetary policy in recent times will gradually lead to distancing from core goals of Central Bank in the Eurozone. There are risks that the ECB is going to buy all securities available, while Mr. Weidmann marked the importance of buying solely low-risks assets; however, there is a probability of deficit among such assets on the market.

The ECB President Mario Draghi, speaking on Monday in the European Parliament, noted that economy of the Eurozone is losing momentum, even though data for July raised some optimism among economists. However, Mr. Draghi assured investors that the ECB will continue implementing new stimulus measures, including the second offering under the TLTRO program in December, as well ABS and covered bonds’ purchases. Last week, banks managed to raise 82.6 billion euro from the ECB. These funds are aimed to heat up inflation and economic growth in the region. In addition, Draghi reminded analysts about the important date of November 4, when the Single Supervisory Mechanism will begin working.

USD

“...you wouldn’t put all your weight on inflation side just as you wouldn’t put all your weight on the labor side.”

- William Dudley, Federal Reserve Bank of New York President

Existing home sales in the United States decreased for the first time in last five months, falling by 1.8% in August on a monthly basis to reach 5.05 million. Data for July was revised slightly downwards to 5.14 million units. The indicator is still below the 5.38 million sales, posted back in July 2013. Analysts confirm that during summer months sales were experiencing a seasonal increase, while now the correction takes place. Investor purchases, in turn, dropped to its lowest level in five years, partly explaining the overall plunge. As the Federal Reserve is preparing to raise interest rates and tighten monetary policy in foreseeable future, homebuyers are getting more concerned about perspectives of the property market in the country.

Continuing about the Federal Reserve, a FOMC member and the New York Fed President William Dudley spoke on Monday’s evening. Being one of the most insistent defenders of the stimulus program and low interest rate policy, Dudley said that changes are possible and they will depend on economic development. Moreover, he noticed that nowadays the monetary policy is working in a different way than it did in the past, meaning that more attention should be paid to the labour market. However, policy makers should find a balance between unemployment and inflation to make any significant changes to the monetary policy stance.

CAD

“As long as the factors leaning on growth persist, a policy rate below neutral would be required to maintain inflation sustainably at target.”

- Carolyn Wilkins, Bank of Canada Deputy Governor

Deputy Governor of the Bank of Canada, speaking in Toronto on Monday, said that the regulator will most likely keep maintaining interest rates at low level for a prolonged period of time, even when economy returns to sustainable growth. The Great Recession left a number of structural problems in the economy, including falling employment, tougher regulation of the financial sector and high level of savings, meaning that consumers are still cautious in their behaviour and are carefully spending free funds.

Giving a speech for the first time since becoming the Deputy Governor in May, Ms. Stevens could not pass by the inflation topic. As long as this indicator is below the 2% target in Canada, interest rates will remain low, however, in the medium-term they may stabilise around the 3-4% neutral mark, which is still around 1.5% below the long-term average. Economists expect the Bank of Canada to start acting not earlier than its British and American colleagues. While the Bank of England set the neutral interest rate at 2.5% and the Federal Reserve put it around 3.75%, these levels are well below the-crisis average key rates. The global economic recovery is taking place slower than forecasted and central banks around the world confirm that they now have a dual mandate, as besides inflation targeting they have to follow unemployment data in order to construct the monetary policy course.

CNY

“Overall the data still point to modest expansion. The property downturn remains the biggest downside risk to growth. We continue to expect more monetary easing from the PBOC in order to steady the recovery.”

- HSBC

Growth in the manufacturing sector of China is likely to increase in the nearest future, keeping country’s economy away from uplifted volatility and downturns on the global market. The benchmark purchasing managers’ index from the HSBC Bank in Hong Kong rose to 50.5 points in September, pointing on a rise in activity of this particular sector of national economy. Economists expected a decline to 50 points from 50.2 in August. A reading above 50 points indicates expansion, while a number below this mark suggests a decline. Recently, the Chinese government announced a series of new measures to heat up economic growth in the country, which may reach as low as 7.5% this year. Program includes liquidity injections into the financial system and building railways. As the Eurozone’s and Japanese economies are stagnating, China and the U.S. are going to remain the growth engines in the foreseeable future. Still, a present reading of the PMI in China indicator means a subdued pace of activity advance, while the biggest share of this month’s jump was provided by surging new orders for internal and export markets. As one more sign of recovery, Chinese exports volumes climbed to a record number last month. At the same time, many concerns of economists are linked with the property market, which was one of the fastest-growing in recent years. However, the government data for August showed that housing prices declined in 68 out of 70 major cities.