Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“I want to welcome the fact that these member states have responded constructively to our concerns”

- Jyrki Katainen, EU Economic Affairs Commissioner

The European Commission said it would approve 2015 French and Italian budget, after the countries made last-minute improvements to spending plans. French Finance Minister Michel Sapin assured that he would slash 3.6-3.7 billion euros from France’s next year budget to meet EU requirements, while Italy also promised to revise its 2015 budget, cutting its deficit goal to 2.6% of GDP from 2.9% after the announcement of its 4.5 billion euros adjustment. The French government expects growth will accelerate to only 1% in 2015 up from 0.4% this year as the Euro zone's second-biggest economy struggles to regain stable footing. The Italian economy is in even worse shape. Italy’s government expects the economy will expand 0.6% in 2015 after slowing by 0.3% this year.

Meanwhile, in the Euro zone’s fourth-biggest economy consumers shared upbeat spending mood in September, the National Statistics Institute reported. Spanish retailers posted an annualized 2.9% growth, compared to a negative reading of 0.9% in August. The Bank of Spain expects the nation's GDP to expand 1.3% in 2014 and 2.0% in 2015, in line with government forecasts, though adding that downside risks to these outlooks have deepened in recent few months amid worsening global growth. Spain will publish its flash estimate for the third quarter GDP on 30 October.

USD

“The Fed can’t ignore a 5.9 percent unemployment rate. The Fed has to acknowledge that things are improving.”

- Michael Gregory, head of U.S. economics at BMO Capital Markets Ltd

29 October will go down to history as the day when the Fed finally concluded the largest and most aggressive asset-buying programme in the history of the US, which had supported the world’s number one economy since the onset of the financial crisis in 2008. The Fed the decision despite the recent elevated volatility in financial markets as well as global economic woes. The six-year old quantitative easing allowed the central bank to buy trillions of dollars of mortgage and US treasury bonds from banks and hedge funds to keep interest rates at zero. Now market participants’ curiosity turns to when the Fed will ultimately raise interest rates, with all expectations set to 2015 rate hike, as the Fed indicated the necessity to “keep the current target range for the federal funds rate a considerable time after the asset purchase programme ends”. However, what is more important is how the Fed plans to get rid of abundant number of assets it has purchased.

All in all, the Fed sounded fairly optimistic about the nation’s economy, as unemployment rate tumbled to 5.9%, the lowest level in six years, while employers have been adding more than 200,000 jobs a month so far this year, and consumers and businesses have been gradually increasing their spending. Also, despite the fact that consumer inflation has been running below the Fed’s 2% goal, the long-term inflation expectations have remained stable

GBP

“Unlike 2009, the current drop in inflation expectations is not seeing a rise in expectations of deflation”

- Michael Saunders, economist at survey sponsor Citi

The number of new mortgages approved in the UK declined in September to a 14-month low, adding to latest evidences Britain’s housing market is cooling. Mortgage approvals fell to 61,267, the lowest level since July 2013, down from 64,054 in August, the Bank of England reported. New approvals have been dropping since January, when they reached the highest level in six years of 76,295. Mortgage lending has been cooling since April, when the Bank of England implemented stricter mortgage rules to keep lending in check. Recently policy makers said that house-price growth is slowing to a “more sustainable pace.” Lending to British businesses also declined, the BOE added. Loans to nonfinancial firms fell in September by 0.7 billion pounds, compared with the 0.9 billion pounds increase in August. Overall net consumer borrowing surged 2.7 billion pounds, compared with the gain of 3.2 billion pounds a month earlier. Despite being strong, it is the lowest increase since February this year, following a small decline in consumer confidence and retail sales. Also, a separate report showed Britons’ expectations for inflation over the coming twelve months remained unchanged at 1.9% in October, in line with the lowest figure since 2009. Inflation expectations for the next five to ten years, however, declined to 2.9% in October, compared with 3.0% a month earlier. The official gauge of consumer prices dip to 1.2% in September, a five-year low.

JPY

“In general, it is better to raise taxes, but in Japan's case it may not be a positive if the shoots of recovery are killed off”

- Takahira Ogawa, director of sovereign ratings at S&P’s

Following recently published positive retail sales data, Japan posted a surprising bounce back of industrial production, adding to hopes the negative impact of the April sales tax hike is waning. However, the government needs more evidence of a sustained recovery before it could confidently proceed with raising the levy next year. Japanese industrial output rose at the fastest pace in nine months in September, surging 2.7% following the 1.9% decline in the preceding month. The largest contributor to the increase of industrial production appeared to be transport equipment, followed by electronic parts and devices, as well as durable electrical machinery. According to a survey conducted by the Ministry of Economy, Trade and Industry, production is projected to rise 1% in November.

Nevertheless, it is still unclear whether the Japanese government will stick to its plan to hike sales tax again in October 2015. Many analysts believe that Prime Minister Shinzo Abe will proceed with tax hike next year, accompanied by fresh stimulus measures to safeguard a fragile recovery in the world’s third-biggest economy. However, Standard & Poor’s said that the country’s credit rating may be put in jeopardy by the second hike of the tax, in case it snuffs out any chance of economic revival. Takahira Ogawa, director of sovereign ratings at S&P’s added the government would need to cut welfare spending and implement structural reforms, in case it opts out to postpone rate hike decision.

NZD

“Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar”

-Graeme Wheeler, Reserve Bank of New Zealand Grovernor

The Reserve Bank of New Zealand did not provide any surprise to the markets, acting in line with expectations and leaving its official cash rate at 3.5%. The central bank highlighted that the economic growth has been faster than the trend in 2014, which has helped to lower unemployment. The expansion is supported by robust construction activity, high net immigration, as well as interest rates, which are still low by historic standards. It is predicted that the output growth will moderate in the years to come towards a more sustainable pace. The RBNZ reiterated its dissatisfaction with the strength of the New Zealand Dollar, citing the current level remains unjustified and unsustainable, but admitted that lower commodity prices as well as volatility in financial markets, which has recently significantly increased, have reduced some pressure on the local currency. The Kiwi has lost as much as 10% against the US Dollar from a recent high in July, largely due to a strengthening Greenback as the Fed concluded its quantitative easing. Nevertheless, the US central bank is not expected to raise interest rates any time soon, thus the New Zealand Dollar will remain elevated for some time. The RBNZ also said that the economy is adjusting to measures undertaken by the bank during the past year. Despite above-trend growth, consumer price inflation is currently at a low level of 1% on year in September. Yet inflation is seen to rise as the economy continues to strengthen. Thus, assessment period is appropriate before pondering further policy changes.