Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The ECB will undoubtedly be fervently hoping that the euro falls further and that this feeds through to push up import prices sooner rather than later"

- Howard Archer, HS Global Insight

The European statistics agency Eurostat confirmed that the inflation rate in the Euro zone slipped in September to the lowest level since October 2009 amid sinking energy prices. Annual consumer inflation in the 18-member union sharing the Euro was 0.3% in September falling down from August’s 0.4% reading. Inflation has now been in the ECB's "danger zone" of below 1% for 12 straight months. The only bright spot for policymakers is core inflation, which strips out the more volatile components of headline inflation. The measure declined from 0.9% to just 0.8% in the year to September, a more marginal drop than the 0.7% expected by analysts. A separate report showed that the Euro zone’s third biggest economy’s current account surplus swelled in August from the previous year. Italy’s current account surplus booked 2.056 billion euros compared to the revised 1.073 billion euros in August 2013.

Greece’s exit from the bailout programme appeared to be under in jeopardy, as Greek 10-year yields rose 72 basis points to 8.58%, following a 85 basis points jump, the biggest surge since July 2012, when the country was on the verge of leaving the Euro zone. Current levels are unsustainable and could threaten once again to cut Greece off from financial markets. Investors are concerned whether Greece will be able to cover its financing needs from markets in case an early bailout exit.

USD

“The labour market looks like it’s truly improving”

- Scotiabank

The number of Americans who seek unemployment benefits unexpectedly declined last week to the lowest level in 14 years, adding to further positive signs that the US labour market is strengthening. Initial claims for state jobless benefits plunged 23,000 to a seasonally adjusted 264,000, the lowest level since 2000, the Labor Department said. The four-week moving average of claims, considered a better gauge of labour market trends as it strips out weekly volatility, dropped 4,250 to 283,500, also its 14-year low. When jobless claims drop below the 400,000 threshold, it is considered a sign of an improving jobs landscape, and when the number declines below 370,000, it indicates jobs are being created rather quickly. For the past nine weeks, the number of jobless claims was below the 370,000 mark.

This was not the only upbeat piece of data out of the U.S. A separate report showed industrial production in the world’s largest economy rose 1% in September against forecasts for a 0.4% gain, the biggest increase since November 2012. In August, output slid 0.2% as the final data further downgraded the originally reported decrease of 0.1%, which had marked the first drop since January. With activity increasing, the amount of productive capacity in use surged to 79.3%, the highest level since June 2008.

GBP

“Indeed, a pick-up in real earnings next year should enable the economic recovery to broadly maintain its current pace despite the euro zone's stagnation and onset of rising interest rates"

- Samuel Tombs, Capital Economics

Martin Weale, a member of the Monetary Policy Committee, said that the pace of drop in the British unemployment rate suggest that wages will start to increase. Thus, Weale reiterated his view that the Bank of England should raise benchmark interest from ultra-low level of 0.5% to 0.75% in anticipation of a build-up of inflationary pressures. Higher wages raise costs for businesses and also result in increasing consumer spending, both drivers that consequently push prices higher. Weale voted for a rate hike in the August and September meetings of the MPC, although he along with Ian McCafferty were outnumbered by seven other policy makers, who insisted on no change in the BoE’s monetary policy. Weale’s comments suggest he again voted for a rate lift at the October meeting. The voting record for that gathering will be released on 22 October. The majority, including Governor Mark Carney, have referred to the “deterioration in the euro-area economy” as a potential risk to the UK’s growth. Weale’s comments came after data showed the inflation rate dropped to 1.2%, the lowest level in five years, and pay growth came at 0.9%. He said inflation, which has been below the BOE’s 2% goal for nine months, has been “significantly depressed” by the stronger Sterling and lower commodity prices. There is a threat that if a rate hikes “were delayed, inflation would be pushed above target or a rather sharper increase in bank rate would be needed subsequently,” he added.

CNY

“It's encouraging that new loans are back under the supervised sector of the economy, but these things can change fairly quickly"

-Annette Beacher, head of Asia-Pacific Research at TD Securities

China’s banks increased their lending in September, but analysts still stress that more monetary easing is required to prop up the ailing economy as foreign investment remained subdued and foreign exchange reserve data indicated potential flight of capital. Domestic banks issued 857.2 billion yuan, or $139.95 billion, worth of new loans in September, overshooting market consensus in a sign that demand for credit is increasing. The September reading beat a median forecast of 750 billion yuan and was substantially higher than August’s figure of 702.5 billion yuan. The rebound in new lending is likely to be attributed to China's "targeted" easing launched earlier this year, which included reserve requirements cuts for some banks.

The People's Bank of China data also showed broad M2 money supply surged 12.9% in September from the previous year, in line with market predictions. The central bank also said total social financing aggregate, a broad measure of liquidity in the Chinese economy, was 1.05 trillion yuan in September, against 957.4 billion yuan in August. China's foreign exchange reserves, the largest in the world, declined slightly to $3.89 trillion in September from $3.99 trillion at the end of June.

CAD

“A lot of the weakness in August manufacturing should be viewed as a one-off given the influence of autos recently”

-Mazen Issa, senior Canada macro strategist at TD Securities

Canada’s manufacturing sector shrank for the first time this year as factory shipments fell the most in more than five years in August led by a drop in automobile shipments. Manufacturing sales plunged 3.3% to C$52.1 billion from the upwardly revised record of C$53.8 billion, the fastest path since May 2009, according to Statistics Canada, exceeding analysts’ forecasts for a 2% fall. Sales dropped after seven months of gains boosted by automakers meeting robust demand. Sales for the reported month dropped in 16 of 21 industries, making up about 81% of the country’s manufacturing, Statistics Canada said. Sales of transportation equipment fell 12.8% to $8.9 billion in August, mostly due to fewer sales of motor vehicles and parts.

Also, August's inventories decreased 0.6% to $71.3 billion amid lower petroleum and the coal product industry. Some of the declines were compensated by the primary metal industry. Meanwhile, Canada recorded the largest trade deficit in nine months in August, as imports rose 3.9% while exports declined 2.5%, leading to a $610 million trade gap. Exports were hurt by the shrinking cars and parts category, which plunged 11.2% to $6.1 billion in August. The Bank of Canada highlighted in its September statement that Canadian exports need to continue strengthening in order to add to sustainable growth.