Daily Forex Fundamental Overview

Fundamental Analysis

USD

“The consumer-price-index numbers helped the dollar and are consistent with the recovery in risk sentiments”

- Vassili Serebriakov, foreign-exchange strategist at BNP Paribas SA

Consumer prices across the US rose more than expected on a monthly basis in September. However, with the inflationary pressure still remaining subdued, the Fed is unlikely to be in a hurry to raise interest rates. The consumer price index inched higher 0.1%, the US Department of Labor said, after a surprising decline of 0.2% recorded in August. Analysts, however, expected a flat reading. On an annual basis, consumer prices rose 1.7% in September, overshooting expectations for a 1.6% reading. Core CPI, which is considered to be a better gauge of long-run inflationary pressures as it strips out volatile food and energy costs, climbed by a seasonally adjusted 0.1% in September versus expectations for a 0.2% gain, while on year the gauge rose 1.7%, unchanged from August.

The Federal Reserve targets 2% inflation. However, inflation has cooled in recent months after accelerating in the second quarter, in as a strengthening US Dollar and slower economic growth in China and the Euro zone sap imported price pressures. Weak inflation and a recent global market sell-off could provide the central bank with ample room to maintain benchmark overnight interest rate on hold, which it has kept near zero since December 2008. Analysts now expect the first interest rate hike in the fourth quarter of 2015 instead of the second quarter. EUR/USD was trading at 1.2668 following the data release, from 1.2699 ahead of the report, while GBP/USD was at 1.6038, compared to 1.6063 earlier.

GBP

“For most members, there remained insufficient evidence of prospective inflationary pressure to justify an immediate increase in bank rate”

- Bank of England minutes

Minutes of the latest BoE’s Monetary Policy Meeting showed that officials remained split on hiking interest rates, with the majority of policy makers voted against immediate rate lift, while two officials were in favour for the third consecutive month. However, all MPC members were unanimous on maintaining the asset purchase facility unchanged. Thus, the MPC agreed in October to leave the BoE’s benchmark interest rate at all-time low of 0.5% and the total size of its bond-buying stimulus programme unchanged at 375 billion pounds. The minutes showed that MPC members Martin Weale and Ian McCafferty reiterated their call for a lift in the benchmark rate to 0.75% but were outnumbered by the remaining seven members of the nine-member panel including Governor Mark Carney. Central bank’s officials became more downbeat about Britain’s economic prospects in October, highlighting increasing headwinds from abroad as well as domestic slowdown. Most policymakers believed there was insufficient evidence of prospective inflationary pressures to justify an immediate increase in the bank rate. Annual inflation declined to 1.2% in September, half a percentage point lower than the MPC had forecast in August and well below the BOE’s 2% target.

The British Pound weakened by 0.3% against the US Dollar after the release, prolonging earlier losses, to reach $1.6023.

CAD

“Canadian consumers are taking a bit of a breather after going on a shopping spree in Q2”

- Benjamin Reitzes, senior economist at BMO Capital Markets

Retail sales in Canada fell for a second consecutive month in August, as gasoline prices dropped and new cars and food recorded weaker sales, according to Statistics Canada. Sales fell 0.3% to C$42.4 billion, the biggest decline this year, following a 0.1% drop in July. Sales decreased in seven of the 11 sub-sectors, accounting for 76% of retail trade. Gasoline stations were the major contributor to the decline, with sales down 2.1% in August to C$5.38 billion. Sales at motor vehicle and parts dealers dropped 0.4%, pushed lower by a 0.6% decline in sales at new car dealers, while food and beverage stores experienced a 0.4% decrease. The data is unlikely to put much pressure on the Bank of Canada, which does not plan to raise interest rates from near all-time lows until there are signs of a sustained economic recovery.

Retail sales follow mixed monthly data releases, such as disappointing manufacturing and upbeat wholesale trade numbers. Canada's manufacturing sales plunged the most in over five years in August, falling 3.3% to C$52.1 billion and reversing last month's record gains, with major losses in the transportation equipment industry. However, wholesale trade climbed 0.2% to C$53.1 in August due to increased sales within the machinery, equipment and supplies category. Meanwhile, the economy posted the largest trade deficit in nine months, as imports rose 3.9% and exports dropped 2.5%, resulting in a C$610 million trade gap.

JPY

“Today’s data supports the BOJ’s view that exports are gradually picking up and that this will continue”

-Junko Nishioka, chief Japan economist at Royal Bank of Scotland Group Plc

Japan’s trade gap widened in September though exports increased more than predicted as the Japanese Yen weakened to near the lowest level in six years, the Finance Ministry said. The nation’s currency has depreciated 8.3% versus the US Dollar over the past year and experienced the biggest monthly decline in September since January 2013. Overseas shipments surged 6.3% from the previous year in September to 6.38 trillion yen, whereas imports rose 6.2% to 7.34 trillion yen. That translated into a trade deficit of 958.3 billion yen, compared to the 943.2 billion yen gap a year earlier. Cars, steel and ships contributed the most to the jump in exports, with the value of motor vehicle shipments rising 7% on year, iron and steel products up 14%, and ships surged almost 40%. A 21% increase in liquid natural gas imports was the main reason behind the rising inbound shipments, followed by an almost 12% increase in telecommunications equipment. Robust exports would bolster the Japanese economy, which contracted the most in more than five years following Abe’s decision to raise the sales tax in April for this first time in 1997. He hiked the levy by 3 percentage points in April, as the government attempts to curb the world’s heaviest debt burden. Abe will consider the health of the economy in the third quarter in his decision due by the end of the year whether to proceed with a lift in the sales tax to 10% next October.

AUD

“I imagine that the Reserve Bank will be pretty happy with this outcome and it certainly will reinforce that period of stability in interest rates”

-Michael Blythe, chief economist at the Commonwealth Bank of Australia

Consumer prices in Australia declined in the third quarter, with a corresponding inflation gauge falling back to a comfortable level in the middle of the Reserve Bank of Australia’s 2-3% target range, providing the central bank with ample room to keep interest rates on hold for longer. Official data by the Bureau of Statistics showed consumer inflation gained 0.5% in the three months through September and slowed to 2.3% from 3% in the previous year. Core inflation, which is intended to strip out the more volatile components of headline inflation, rose by an average of 0.5% in the third quarter from the previous three-month period, in line with analysts’ expectations. The most significant price increases last quarter included a 14.7% jump in fruit prices, a 1.1% climb in new house prices, and a 6.3% advance in property rates and charges. However, price drops in electricity and fuel offset those price increases, as the components declined 5.1% and 2.5%, respectively. Soft economic performance has helped keep inflationary pressures contained over the past couple of years, and are seen to do so for some time. However, recent depreciation in the Aussie Dollar should boost inflation by increasing import costs, though this usually happens with a time lag. The RBA's outlook is that sluggish wage growth should keep inflation consistent with the target even with lower levels of the nation’s Dollar, according to the central bank's policy statement on October 7.