Fundamental Analysis
EUR
“The eurozone saw slightly faster growth of business activity in December but still ended the year on a whimper rather than a roar, with worrying weakness still evident in the core countries of France and Germany”
- Chris Williamson, chief economist at Markit
Activity in the manufacturing and services sectors in the 18-nation bloc improved in December, despite the mixed data coming out from the region’s largest economies, namely Germany and France. The preliminary manufacturing PMI for the Euro bloc rose to 50.8 points up from 50.1 in November, remaining in the green zone for 18 consecutive months. As to the Euro zone’s services PMI, the flash reading climbed to 51.9 points in the reported month, up from 51.1 in November. Moreover, the closely watched composite PMI came out at 51.9 points, also an improved reading compared to a month earlier. In Germany, the Euro area's growth engine, the manufacturing sector returned to expansion with the corresponding index rising to 51.2, whereas the services sector activity slid to 51.4 points in December. In France, the Euro zone’s second biggest economy, both sectors remained in red territory with the flash manufacturing PMI falling further to 47.9 points and the flash services PMI rising 49.8 points following last month's 47.9.
Meanwhile, German investors became more optimistic in December as the ZEW index, measuring investors’ sentiment for the next six months, advanced to 31.8 in December, compared with 11.5 recorded in November. The ZEW Current Situation Index also jumped considerably, soaring to 34.9 following a 3.3 figure a month earlier.
USD
“With labor market conditions continuing to be favorable ... we believe that it will be only a matter of time before the housing recovery shifts up a gear or two and provides a crucial second wind to the economic recovery”
- Millan Mulraine, deputy chief economist at TD Securities
US housing starts and building permits dropped in November, but the underlying trend points to consistently improving housing market, albeit the recovery appears to be uneven. Groundbreaking declined 1.6% in November from the preceding month to a seasonally adjusted annual rate of 1.028 million units, the Commerce Department reported. October's housing starts were revised up to a pace of 1.045 million units. Meanwhile, building permits, a leading indicator of construction, dropped 5.2% to 1.035 million in November. Housing market recovery continues to be restrained by tepid wage growth, which has been far outpaced by home price gains. Higher mortgage rates are also a constraint, although they have dropped from a high reached in September 2013. On top of that, the housing recovery also is being challenged by a very slow pace of household formation, as high jobless rate among young people is forcing many to either continue living with their parents or share quarters with friends or relatives.
Separately, activity in the US manufacturing sector continued to rise, albeit at a slower rate in December. The preliminary manufacturing PMI fell to 53.7 in the reported month, down from 54.8 points in November. The index surged to 53-month high of 57.9 in August and has been following a downward trend since then.
GBP
“There's some relief that the Bank of England is willing to look through downside surprises on inflation”
- Daragh Maher, a currency strategist at HSBC
Britain’s inflation slid to the lowest level in 12 years in November as falling fuel prices pushed down transport costs, while food prices declined. The UK consumer prices dropped to 1%, down from 1.3% and compared with economists’ expectations for 1.2%, the Office for National Statistics said. Oil prices have declined about 45% this year, pushing down energy costs across the globe. If inflation drops below 1% the Bank of England Governor Mark Carney would have to write a letter of explanation to the Chancellor George Osborne. The Bank of England said last month it projects inflation to slide below 1% in the next few months, and since then oil prices have plummeted further.
The British Pound rebounded from the lowest level in three weeks versus the single currency on Tuesday after Bank of England Governor Mark Carney played down UK inflation data. Carney said that falling oil prices were positive for the British economy and that inflation data left the BoE’s policy stance intact. Until the summer, market participants were betting that the BoE would be the first major central bank to lift interest rates from their historic near-zero levels, driving the Pound to a six-year peak versus the Greenback at almost $1.72 in July. The recent figures, however, fuelled speculation that BoE policy makers are at least a year away from raising interest rates.
CAD
“It’s a negative for October GDP”
- CIBC World Markets
Canada’s manufacturing sales declined more than expected in October, dragged down by a fall in production of aerospace products, following a record increase in the preceding month. According to Statistics Canada, factory shipments dropped 0.6% to $52.7 billion following an upwardly revised 2.2% increase in September. Analysts, however, had expected a 0.4% drop. Production of aerospace products and parts plummeted by 15.6% following a 17.4% jump in September, a month when output in the sector reached a record high. The primary metals industry posted a 5.5% dip from September, when sales had risen to their highest level since October 2008. Stripping out these two sectors, overall manufacturing sales rose by 0.4% from September.
Canada’s manufacturing sector is heavily dependent on exports, three-quarters of which go to the US. The gradually recovering American economy and the recent weakness in the Canadian Dollar, which makes the country’s exports more competitive in global markets, will drive sustainable economic growth in Canada. Canada is a net exporter of oil, which accounts the biggest share of its total shipments. The Bank of Canada praised Canadian exports, saying that they are on the path to recovery. However, the weakness in oil prices was not obvious in October’s manufacturing sales report.
AUD
“Very low interest rates had supported activity in the housing market, which in turn was expected to support consumption”
- Reserve Bank of Australia
The Reserve Bank of Australia still believes that the nation’s currency is too strong and that interest rates should be kept unchanged, rather than to be reduced further. The policy makers made no indication that it intends to ease monetary policy further despite investors’ speculation that the central bank will cut rates next year given growing concerns over the Australian economy. Expectations of interest rate cuts have surged after Australia recorded third quarter economic growth of 0.3%, against market expectations. Several trustworthy forecasters, including economists at Westpac, Goldman Sachs, National Australia Bank, Deutsche Bank and AMP Capital see the RBA slashing interest rate next year.
The central bank raised fresh concerns about the strength of the Australian Dollar, saying that monetary policies of other central banks are causing the exchange rate to remain elevated, which is limiting growth in Australia's economy. It highlighted once again the Aussie Dollar remained above most estimates of its fundamental value, especially considering recent significant falls in commodity prices. Thus, the board agreed that further Aussie’s depreciation was likely to be needed to achieve balanced growth in the economy. The RBA officials also expressed concern about sluggish employment growth that was likely to weigh on consumer confidence and consumer spending for some time.
This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.
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