Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds”

- Mario Draghi, ECB President

A gauge of German economic confidence rebounded, overshooting market expectations, fuelling hopes of an improvement in Europe’s number one economy after it barely escaped recession in the third quarter. The ZEW index, designed to measure investor sentiment for the upcoming six months and reflect the gap between the share of optimists and pessimists, soared to 11.5 in November up from the -3.6 recorded a month earlier, the lowest level since November 2012. It is the first improvement since January this year. The ZEW Current Situation Index, meanwhile, improved slightly to 3.3 after 3.2 a month ago, suggesting that investors in Germany are becoming more and more optimistic about the nation's economy.

The President of the European Central Bank on Monday shared a slightly more upbeat assessment of the Euro bloc’s economy, saying that a drop in bank lending appears to have reversed and pointing out that the most economies in the region are growing. Nevertheless, the central bank is willing to take additional easing measures if needed to keep inflation from staying too low for too long. Mario Draghi explicitly cited government-bond purchases as a policy tool officials could use to stimulate the economy in case the outlook worsens. Meanwhile, the Greek government and Troika are deadlocked over the last round of measures needed to release the final tranche of the country’s bailout.

USD

“There is no inflation pressure building that could cause the Fed to want to move earlier in terms of their (rates) lift off”

- Chris Rupkey, chief financial economist at MUFG Union Bank

US producer prices surprisingly inched higher in October, though underlying trend pointed to a subdued inflation that could foster the Fed to keep interest rates at ultra-low level a bit longer. According to the Labor Department, the producer price index rose 0.2%, led by an increase in prices for services, following the 0.1% drop a month earlier. The core PPI, which strips out food, energy and trade services, climbed a modest 0.1% after falling 0.1% in the preceding month. On an annual basis, PPI declined to 1.5%, from 1.6% growth in the previous period, while analysts had expected a 1.3% expansion. Core PPI annually increased to 1.8%, compared with 1.6% in the prior-year period.

A separate report showed American homebuilder sentiment rose in November, recovering from the sharpest decline since February in the previous month as market conditions looked much better. The NAHB/Wells Fargo Housing Market index rose to 58 in the reported month up from 54 in October, with the gauge hovering above 50 for a fifth consecutive months. So far this year, the reading is running at an average 52 points, a notch higher than last year. Although housing remains one of the weak spots of the nation’s economy, economists expect the market to strengthen over the next few quarters. The main catalysts behind the anticipated pick-up should be rising employment, historically low mortgage rates as well as easing credit standards.

GBP

“Inflation is more likely than not to fall temporarily below 1% at some point over the next six months”

- Bank of England

Britain’s inflation unexpectedly rose last month from the lowest level in five years as transport prices declined less than in the previous year. Consumer prices increased an annual 1.3% from 1.2% in September, according to the Office for National Statistics. The ONS reported food and non-alcoholic beverages dropped 1.4%, marking the longest streak of falling prices for those goods since 2000 due to supermarkets’ price war. The core CPI, which excludes volatile components such as food, energy, alcohol and tobacco, remained unchanged at 1.5%.

Inflation in Britain has been slowing sharply in the last 12 months and is projected to remain subdued below the official 2% target for the next three years, according to the BoE's latest forecasts. The BoE said last week that inflation might drop to below 1% over the next six months and it expected annual price growth to reach its goal of 2% only towards the end of a three-year outlook period. As for the medium-term outlook, the central bank expects the CPI rate to stay at around 1% in the beginning of 2015, before inching higher to 1.1% in the second quarter. It then projects inflation at 1.6% in the first quarter of 2016, down from the 1.7% it estimated in August. Subdued inflationary pressures also allow the BoE to keep its monetary policy highly accommodative for the nearest future as both external and internal price pressures remain benign.

AUD

“Despite the recent depreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the further declines in key commodity prices over the course of the year to date”

- Reserve Bank of Australia

The Australian Dollar strengthened against its US counterpart even after minutes from the latest Reserve Bank of Australia’s recent meeting showed policy makers’ dissatisfaction with current levels of the nation's currency, reiterating it was still above the fundamental value. Despite sharp declines in commodity prices since January, a key catalyst of the exchange rate over the long term, the Aussie Dollar was overvalued at the end of October against the currencies of Australia's trading partners, the RBA noted. Thus, the exchange rate has been “offering less assistance than would normally be expected in achieving balanced growth in the economy,” the RBA said.

The board members decided to keep its benchmark cash rate at 2.5% for the 15th straight month at the November meeting, and signalled that it was likely to remain there for some time, helping to boost demand as the economic transition away from mining-driven growth continues to put pressure on employment and investment levels. In addition to that, Reserve Bank Governor Glenn Stevens said he wanted to ensure a housing price boom does not turn to a bust and undermine economic growth. Another growing concerns for Australia is how the Chinese property market will evolve, with recent weakness posing a threat to Australia's export sector.

JPY

“I am aware that critics say 'Abenomics' is a failure and not working but I have not heard one concrete idea what to do instead ... Are our economic policies mistaken, or correct? Is there another option?”

- Shinzo Abe, Japan’s Prime Minister

Japan’s Prime Minister Shinzo Abe dissolved the parliament and called an early election as he sought to prolong his term and save his Abenomics policies as the country slipped into recession. Early parliamentary elections are scheduled for 14 December 2014, two years ahead of the originally planned date. Although Abe’s popularity has fallen recently, he is seen to win the early election. However, Abe said he would resign in case his coalition did not win a majority, which would mean a rejection of Abenomics.

Abe also decided to delay for 18 months a second sales tax hike from the current 8% to 10% after the first lift in April led the economy shrank for two consecutive quarters. Preliminary data showed GDP of the world’s third largest economy shrank 0.4% in the July-September quarter, coming in much worse than the 0.5% growth rate expected by economists. Nevertheless, the recession did not mean Abenomics, the policy of unprecedented monetary easing, stimulus spending and structural reform, was a failure, Abe noted. Abe pledged that the sales tax rise, required to fund swelling social security costs and curtail Japan's massive public debt, would be implemented without fail in April 2017. Abe, who is serving his second term as prime minister after a difficult 2006-2007 term, inherited the sales tax plan from his predecessor based on a ruling-opposition party agreement, in which he played no direct part.