Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“We’re not categorically ruling it out, but I’m skeptical”

- Klaas Knot, ECB policy maker

Euro zone’s current account surplus rose to 30.0 billion euros in September compared with the upwardly revised 22.88 billion surplus in the previous month. The indicator is important for the long-term confidence of investors and trading partners, as a positive current account balance signals that the entity is a net lender to the rest of the world.

Meanwhile, Klaas Knot, the Dutch Central Bank President questioned the effectiveness of additional QE steps from the ECB, which may also include purchases of government bonds. Knot said that it is not certain whether such measures would help fight stubbornly low inflation in the currency bloc. He also added that there is no sense to pursue buying government bonds now, as many Euro zone’s nations can borrow at historically low rates, as well as the ECB has already implemented a large number of measures to combat disinflationary trend, but it needs some time for them to prove effective. He believes that the main catalyst behind cooling inflation is falling oil prices and he stressed that there is no evidence of deflation for now. At the same time the latest study of the French Economic Observatory reveals that the falling value of the Euro should limit risk of deflation and help economies grow in 2015. Spain is projected to be the biggest winner. The think tank believes that the Euro will continue depreciate next year as well.

USD

“Many participants observed that the committee should remain attentive to evidence of a possible down shift in longer-term inflation expectations”

- FOMC minutes

The subdued pace of inflation is replacing jobless rate as the main reason the Fed is not ready to begin hiking interest rates, minutes of the latest FOMC meeting showed. Thus, the Fed plans to keep short-term interest rates near zero for a considerable period. The central bank is likely to start raising rate in the mid-2015. Minutes showed that couple of officials wanted the Fed to signal that it may raise rates sooner, while others wanted the central bank to indicate it may wait longer. Officials noted that economic growth and employment growth remain unusually steady, and policy makers continued to expect both trends would persist. Moreover, the central bank appeared to be calm about signs of economic weakness in Europe and Asia, as well as recent market volatility.

US housing starts surprisingly declined in October, while an increase in permits to the highest level in more than six years suggested the housing market was gradually regaining footing. Groundbreakings for single-family homes, condominiums and apartments dropped 2.8% to an annual 1.01 million rate following September’s 1.04 million pace, the Commerce Department said. The data also revealed that building permits soared 4.8% to 1.080 million, the highest level since June 2008. Coupled with the industry sentiment running near nine-year highs, low interest rates, and increasing employment, the housing data confirms that the broader economy is growing at an above-trend pace.

GBP

“Among the members in this group, there was a material spread of views on the balance of risks to the outlook”

- BoE minutes

For the fourth months in a row the Bank of England policy makers remain split on interest rate hike, with two officials voting for an immediate rate increase, the November Monetary Policy Committee minutes showed. Martin Weale and Ian McCafferty, who stack to their call to raise rates by 0.25 percentage points to 0.75% for the fourth straight month, argued that low inflation, which stood at 1.3% in October, was largely the result of a stronger Pound and lower commodity prices. However, some of those, who were in favour of keeping rates at the ultra-low level of 0.5% amid weak outlook for inflation, thought there was a threat that the UK’s growth might soften more than projected, while inflation may stay lower for longer. This might leave the nation’s economy vulnerable to shocks in rates increased too soon. However, others stressed a risk that spare capacity could be used up more rapidly than the central bank’s latest forecasts show. This could lead to inflation overshooting the Bank's 2% target. In general, the tone of the minutes indicated some top BoE policy makers were less sure of the necessity to keep interest rates on hold going into 2015. However, policymakers agreed that while Britain’s growth was slowing, output was still expected to rise at close to the historical average. Most officials also agreed that while domestic price pressures remain subdued, recent increases in private sector pay growth indicated "there were good reasons to expect it to rise over time".

CNY

“We think growth still faces significant downward pressures, and more monetary and fiscal easing measures should be deployed”

- Hongbin Qu, economist at HSBC

Activity in China’s manufacturing sector slowed in November, with output falling and deflationary pressures increasing, underscoring weak demand in the Asian economy. HSBC flash PMI reading dropped to 50.0 in the reported month, the lowest level in six months, increasing pressure on the Chinese government to take further steps to spur growth in the world’s second biggest economy. In October the gauge came in at 50.4, with a reading above 50 indicating expansion in the sector. Manufacturing data is the latest in a streak of softer indicators in recent weeks. GDP growth slowed to 7.3% on year in the third quarter, the slowest pace in more than five years, amid weaker credit and investment growth, as well as a property slump.

Undermined by a cooling property sector, erratic demand from overseas and slackening domestic investment growth, China's economy is expected posting its weakest annual growth in 24 years this year at 7.4%. To reenergize the economy, Beijing has rolled out a steady stream of stimulus since April attempting to support flagging growth. Chinese authorities are likely to maintain their current targeted fiscal and monetary policy approach, although pressure is building to take more decisive steps, including an interest-rate cut or a reduction in the capital reserves that financial institutions must hold with the central bank.

JPY

“The economy is much weaker than expected and it will become clearer that the economy and inflation are veering away from the BOJ’s scenario”

- Takuji Aida, an economist at Societe Generale SA

Despite the recent downbeat data, which showed the Japanese economy slipped into recession, the Bank of Japan decided to keep its monetary policy and its optimistic economic outlook unchanged, allowing some time to assess the effect of its unexpected easing last month. The central bank believes that the downturn caused by sales tax increase will be short-lived, thus the economy will continue to enjoy a moderate recovery going on forward. Nevertheless, the upbeat view contrasts with a Prime Minister Shinzo Abe’s statement that the nation’s economy is not strong enough to proceed with a second tax hike initially scheduled for next year. The BoJ Governor Haruhiko Kuroda did not criticize though Abe’s decision to delay a tax increase that the central banker had supported as a required budget-balancing move.

As widely expected, the BoJ decided by a majority of policy makers to continue its purchases of government bonds and risky assets, keeping its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 80 trillion yen. In addition, the central bank upgraded its outlook on exports, noting that “exports have been more or less flat.” However, the central bank warned inflation could slow to below 1% , after the economy shrank an annualized 1.6% last quarter.