Daily Forex Fundamental Overview

Fundamental Analysis

Blow of disinflation winds intensifies

The streak of negative news from the Euro zone seems never ending. Last week 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. In addition to that, German investment morale deteriorated further in October, with the ZEW's index of investor and analyst expectations plunging to minus 3.6 in October from 6.9 in September. That is the 10th month of drops and the first negative reading since November 2012. Amid bleak economic activity in the Euro zone's powerhouse, the German Finance Ministry cut its growth outlook to 1.2% from 1.8% for 2014, and its forecast for 2015 to 1.3% from 2%. Subdued German sentiment and a recent streak of weak fundamentals coupled with low inflation expectations, raises the likelihood of the European Central Bank turning to printing money to purchase government bonds, known as quantitative easing. Meanwhile, in the ranks of the governing council there are those who do not support Mario Draghi’s intentions. European officials continue to argue over how much more stimulus the European Central Bank should provide to the Euro zone's economy. President Mario Draghi reiterated his pledge to expand the central bank's balance sheet by as much as 1 trillion euros to combat deflationary threat. However, Bundesbank head Jens Weidmann replied by saying that a target value is still a subject for discussion. This deepening conflict between two central bankers resulted in an exclusion of Weidmann from decision making process in a time when crucial decisions are about to be made.

With continental Europe and Japan being on the verge of another recession and China's economy is also slowing, the Fed officials are concerned about the impact a slowdown in elsewhere in the world may have on the US economy, and warned that it could force them to delay the interest rate hike. Global economic outlook will not only determine timing of the first rate hike in the US, but will also shape the BoE’s monetary policy decisions. The central bank predicted that the UK's robust economic growth will fade slightly towards the end of 2014, and would continue to focus on domestic inflationary pressures. Britain's inflation rate fell further in September as declining oil prices and a stronger local currency lowered imports costs, reinforcing the view the Bank of England will maintain interest rates at 320-year low for now.

EUR

“This would run counter to everything we have strived to achieve in banking regulation over the last years”

- Jens Weidmann, Bundesbank President

Eurostat, the European Union’s statistics office, revised the Euro zone’s Q1 and Q2 growth, as it started to use new statistical methodology. Gross domestic product grew 0.3% and 0.1% in the beginning of the year up from the initial figure, which showed flat growth. Likewise, annual growth for the currency bloc was revised to 0.8% in the second quarter from 0.7%.

Meanwhile, German Bundesbank President Jens Weidmann reiterated his disagreement with the European Central Bank’s recent decision to buy large sums of asset-backed securities, a form of quantitative easing, highlighting that the programme hampers efforts made in banking regulation and will do little to support the weak Euro zone’s economy. Weidmann stressed that the Euro area's economic stagnation was due to structural factors rather than monetary policy. The Bundesbank Head also warned that the ECB's plan would only serve to transfer risks from financial institutions to the central bank and, ultimately, taxpayers. Last month, the ECB unveiled a programme to purchase asset-backed securities, with an effort to raise money supply and boost credit flow to the private sector. Although the ECB has refused to liken its ABS programme to quantitative easing, it will have a similar effect of increasing liquidity in the market.

USD

“The trend in starts continues to be up”

- David Berson, chief economist at Nationwide Insurance

US home building activity rose in September, indicating steady job creation and falling interest rates could support construction late this year. Housing starts rose an annualized 6.3% to 1.02 million up from a revised 957,000 recorded in August, the Commerce Department reported. A robust April was followed by declining starts in May and June, before soaring 21% in July to a post-recession peak of a 1.1 million annual rate. Construction has slowly recovered from the trough of the housing crisis, but the pace of starts remains well below the annual average of 1.7 million from 1996 to 2006. Building permits, a proxy of future construction, advanced 1.5% last month to a 1.018 million rate. There is a number of factors supporting a stronger finish to the year for home building. The labour market has created more than 200,000 jobs on average each month this year and the jobless rate dropped to 5.9% in September, the lowest level since 2008. Lower interest rates on mortgages could also boost demand for homes late in the year. The average interest rate on a 30-year mortgage fell to 3.97% this week, the first time rates have declined below 4% in more than a year.

Meanwhile, US consumer sentiment jumped in October to 86.4, the highest level in more than seven years, supported by views on personal finances and the national economy.

GBP

“Haldane's comments have added to the changing market expectations of a rate hike”

- Alvin Tan, currency strategist at Societe Generale

Britain's economic recovery might be jeopardized by a premature decision to raise interest rates, Andrew Haldane, the Bank of England's chief economist said, providing the strongest signal yet that the central bank is ready to delay increases in borrowing costs. Haldane appeared to be pessimistic about the British economy due to weaker global economy, low wage growth as well as financial and political risks. The prospect that interest rates will remain lower for longer period of time pushed the Sterling lower on the foreign exchanges, with the Pound weakening half a cent versus the US Dollar. Haldane's dovish comments follows hawkish view presented by the Monetary Policy Committee member Martin Weale, who said that despite the current rate of inflation below target, there are risks it could accelerate above the goal in the medium-term if the BoE keeps delaying interest rate lifts. The current rate of consumer inflation declined to 1.2% largely due to early this year's advance of the local currency imports and lower energy costs.

The UK interest rates have stood at a record low of 0.5% since the peak of the financial crisis more than five-and-a-half years ago. Market predictions of when they will finally rise have changed sharply in the past few days following the biggest global sell-off of shares in two years due to concerns of slower growth and intensifying political risk.

CAD

“Headline inflation is likely to remain relatively contained and could even fall if energy prices continue to decline. However, core inflation could accelerate a little bit further due to the continued pass-through from the weaker C$”

-Reitzes

Canada’s annual rate of inflation fell in September, bringing the pace of price increases in line with the Bank of Canada’s goal and ensuring policy makers’ benchmark lending rate will remain on hold for the time being. September's Consumer Price Index edged down to 2% from the highest level in more than two years of 2.1% in August, led by cheaper gas and flat auto prices. Meanwhile, the core inflation, which strips out key volatile items including some energy and food products and which the Bank of Canada uses as its “operational guide” for setting interest-rate policy, came in unchanged from the preceding month at 2.1% in September. The released data did not surprise the markets, coming in line with analysts' expectations in both categories. Economists are predicting relatively subdued annual inflation figures and slightly better core data for the rest of 2014.

This week, the Bank of Canada will hold its rate-decision meeting and release the quarterly Monetary Policy Report, a document that accesses domestic and global economic trends, as well as updates forecasts for growth and inflation trends. The central bank has kept its benchmark lending level at 1% since September 2010, and most analysts have ruled out any lift in the rate until around mid-2015.

NZD

“Given internet access new information is very quickly incorporated into prices”

-Rob Rennie, chief currency strategist at Westpac

The Reserve Bank of New Zealand is changing how it calculates the Trade-Weighted Index, by broadening the currency basket it uses to calculate the value of the Kiwi dollar, to better reflect the nation's trading relationships. Starting from December 11, the number of currencies in the benchmark trade-weighted index will increase to 17 from five, the RBNZ said. The updated TWI will include China, New Zealand's trading partner, as well as Australia, the US, the Eurozone, Japan, Singapore, the UK, South Korea, Malaysia, Thailand, Indonesia, India, Canada, Taiwan, Hong Kong, Vietnam and the Philippines. Foreign exchange market participants think the chance of Reserve Bank of New Zealand intervention to weaken the Kiwi Dollar remains very high even after the currency has depreciated by 10% from the highest level in 32 years at the beginning of July.

In the meantime, the New Zealand Dollar slumped from 79.5 US cents to below 78.8 US cents, after the central bank accidentally republished a September 25 release that had said the New Zealand dollar’s value was “unjustified and unsustainable”. New Zealand’s central bank tends to release statements on a more irregular basis than the Reserve Bank of Australia, and the September press release itself was a surprise.