Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The pressure in this direction is high"

- A person familiar with a matter

The European Central Bank is pondering to purchase corporate bonds on the secondary market and may make the corresponding decision as soon as December, several people familiar with a matter said. The central bank may begin buying bonds already in the beginning of next year. This would expand the recently launched private-sector asset-buying scheme, part of a private-sector asset-purchase programme that will also see it buy asset-backed securities later this year. It is estimated that the central bank could inject one trillion euros into the Euro zone’s financial system. These measures are aimed at increasing lending to businesses and thereby support the Euro zone economy. However, there is concern at the ECB that these measures may have an insufficient effect to help support the economy.

The ECB has already bought Spanish, French and German covered bonds with maturities from one to six years. The central bank will publish the exact amounts purchased every Monday. The other part of its asset-buying programme, the ABS purchases, will begin in the fourth quarter and will be accompanied by another tool, a second round of TLTROs, or four-year loans at ultra-cheap rates offered to the region’s banking sector. The policy makers hope that all these measures along with borrowing costs at historic low are seen to lift price growth in the Euro area and boost the economy through increased lending to the private sector.

USD

“The housing recovery continues to move along sluggishly, as consumers are stuck between tight credit standards and limited wage growth”

- Sophia Kearney-Lederman, an economist at FTN Financial

US existing home sales surged to the highest level this year in September, adding to further evidence the housing market is gradually recovering. According to the National Association of Realtors, sales of previously-owned homes rose 2.4% to an annual rate of 5.17 million units, overshooting analysts’ expectations for a 5.10 million unit pace and following a decline in August to 5.05 million units. Nevertheless, despite the latest progress, the market continues to underperform. Sales remained 1.7% lower than in September last year. Housing is slowly getting back on track after activity stalled in the second half of last year after a run-up in mortgage rates. While activity in the property market continues to be subdued due to sluggish wage growth, a recent drop in mortgage rates should help bolster sales.

The 30-year mortgage rate declined to 3.97% last week from 4.12% in the week ended 9 October, according to Freddie Mac. The drop reflected a sharp fall in U.S. Treasury debt yields as traders pushed back expectations for the first Fed’s interest rate increase in light of worrisome economic news from abroad and a big sell-off in global stock markets. In the meantime, home prices continue to rise. The average sale price for a home last month stood at $209,700, up 5.6% from the previous year. Prices have risen year-on-year for 31 straight months.

GBP

“With borrowing cuts missing in action, the Chancellor could face a testing time in the run-up to the election”

- Robert Wood, chief economist at Berenberg bank

Britain’s government borrowing increased more than expected in September amid a surge in central government borrowing and precipitous decline in interest and dividends receipts, challenging Finance Minister George Osborne to meet his full-year borrowing targets. Net borrowing excluding public-sector banks stood at 58 billion pounds between April and September compared with 52.6 billion pounds a year earlier, the Office for National Statistics said. Borrowing for September alone was 15.3% higher than in the previous year at 11.8 billion pounds. That compared with economists expectations for it to hold around 10.5 billion pounds. The government said that the extra borrowing so far this year is due to an uneven pattern of tax receipts in 2013, and that the differences would even out before the end of the financial year. The underperformance so far largely reflects smaller-than-expected income-tax receipts, as many of jobs being created were not bringing the expected increase in income tax revenues. Data showed that revenue from income tax and employment insurance contributions in September was 2.3% higher than a year ago, while for the year to date it was up by just 0.5%.

In March, government forecasters predicted the budget deficit would shrink by about 12 billion pounds in the current fiscal year.

CNY

“It is now time for really deepening and doing the reforms in a much faster way”

-Sri Mulyani, World Bank Managing Director

China’s posted the slowest economic growth since the global financial crisis in the third quarter and risks missing the official goal for the first time in 15 years, reinforcing the view the world’s number two economy is becoming a drag on global economy. China’s GDP rose 7.3% in the July-September quarter from the previous year, slightly exceeding analysts’ predictions for a 7.2% growth. Although there has been some slowing in the economy, particularly in the property sector, the overall economy and labour market remain resilient, putting less pressure on stimulus expansion. Economists remained divided on whether or not officials would step in with extra stimulus measures such as interest rate cuts. Nevertheless, China’s government said previously it would tolerate economic growth slightly below the official target this year by refraining from broad stimulus. However, World Bank Managing Director Sri Mulyani urged Chinese policymakers to deepen and implement reforms at a much faster manner and not rely solely on fiscal and monetary policy to fuel growth. The bank is predicting a 6% growth in the medium to long term. The International Monetary Fund forecasts 7.4% GDP growth this year and 7.1% in 2015. In the long-run, the Conference Board expects the Chinese economy expanding at a 4% pace annually after 2020 following decades of rapid growth. China’s GDP goal was 7.5% in 2012 and 2013, with actual growth of 7.7% both years.

AUD

“The Australian dollar was now around its January low against the U.S. dollar but remained a little higher on a trade-weighted basis than earlier in the year”

-Reserve Bank of Australia

Minutes of the Reserve Bank of Australia October policy meeting showed that central bankers became more focused on market volatility and global growth, with intensifying concerns over China, Japan and Europe. The RBA plans to keep official interest rates at a historic low of 2.5% until well into next year to support Australia’s economy. The RBA said ongoing accommodative monetary policy should bolster demand and help growth strengthen over time. Governor Glenn Stevens has said that further cuts in the cash rate are unlikely as they would trigger a build-up of risk in the economy, where house prices have advanced an annual 14.3% in Sydney in September. The RBA last cut the official cash rate by 0.25 percentage point to a new historic low of 2.5% at the August 6 board meeting in 2013.

Minutes also showed officials’ dissatisfaction with the nation’s currency strength, as it still remains high by historic standards, especially given recent drops in commodity prices. Thus, the Australian Dollar provides a little help to rebalance the economy. The Aussie Dollar had declined about 6% versus the Greenback in the past three months, falling from the recent high of 95 US cents in July. The RBA said that a depreciation was mostly due to a strengthening of the US Dollar versus most major counterparts.