Daily Forex Fundamental Overview

Fundamental Analysis

Major events of the previous week

Last week the Bundesbank’s comments came as a surprise, as the German central bank unexpectedly supported the European Central Bank's view on taking further stimulus measures to bolster the Euro zone economy if needed, though the German central bank did not openly back up the ECB's quantitative easing. The German central bank's language surprised analysts, as Bundesbank Chief Jens Weidmann had previously reiterated the need of more reforms in Euro zone countries as the main tool for fuelling growth and has been reluctant to endorse quantitative easing. ECB policymakers are debating whether to take fresh action to combat the threat of deflation in the Euro zone, where inflation is running at 0.3%, markedly below the ECB's target of just under 2%. Analysts are worried that falling oil prices could send the Euro zone into a deflationary spiral, forcing the ECB to buy sovereign debt early next year.

Meanwhile, the Swiss National Bank slashed deposit rate, sending it to the negative territory, to limit inflows from investors seeking a safe haven place to park their cash. Policy makers in the Alpine nation imposed a charge of 0.25% on sight deposits, the cash-like holdings of commercial banks at the Swiss central bank. The SNB thus expanded the target range for the three-month Libor to -0.75%-0.25% and extended it to its usual width of 1 percentage point. The SNB reiterated its commitment to the minimum exchange rate of 1.20 francs per Euro, underlying that it would defend the cap the "utmost determination" and implement further measures if needed. Given the fact the results of the second round of TLTRO failed to bring relief to the ECB policy makers, further loosening is a matter of time, which may challenge the SNB's task to defend the lid.

In Britain 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%. 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. As a result, the vote of the MPC remained unchanged in December, with the majority of policy makers believing that weak inflation outlook warranted maintaining interest rates intact at all-time low of 0.5%.

Across the Atlantic, concluding the FOMC's two-day meeting, Fed Chairwoman Janet Yellen said that the US central bank plans to hike interest rates next year, but it would take a patient approach in deciding on a timing of the first rate hike, which would not take place any earlier than late April. Yellen's comments along with the FOMC statement indicated that the Fed was not inclined to start normalizing its monetary stance more quickly despite recent upbeat economic data, including stronger employment growth and falling oil prices. Still-elevated unemployment rate and below-target inflation provides the central bank with flexibility to take gradual approach to lifting rates. The FOMC statement also showed that the overwhelming majority of policy makers expect the Fed to raise the federal funds rate by 0.75-1.75 percentage points in 2015.

EUR

“The accounts will contain an overview of financial market, economic and monetary developments. This will be followed by a summary of the discussion, in an unattributed form, on the economic and monetary analyses and on the monetary policy stance”

- ECB

German consumer morale rose to the highest level in eight years, as shoppers expect the European growth engine to regain momentum. Gfk consumer sentiment indicator, based on a survey of around 2,000 Germans, climbed to 9.0 heading into January, up from 8.7 in December. Shoppers became more willing to spend as plummeting energy prices pushed down the cost of heating oil and petrol, leaving households with more money to spend on other items. On top of that, domestic conditions remain favourable for consumption, with employment at a record high, wages advancing and inflation moderate.

A separate report showed the Euro zone current account surplus shrank in October compared to the preceding month on a seasonally adjusted basis, according to the European Central Bank. The current account surplus declined to 20.5 billion euros, down from a revised 32.0 billion euros reported in September. The ECB also announced that starting from January 22, 2015, the central bank will release minutes of Governing Council monetary policy discussions to "provide the rationale behind monetary policy decisions." The accounts will be released four weeks after each meeting. With Lithuania joining the Euro zone on January 1, 2015, the Governing Council will consist of 25 members: six members of the ECB's Executive Board and 19 national central bank governors.

GBP

“This year has seen a sharp fall in the amount of tax raised for every pound of measured economic activity”

- The Office for Budget Responsibility

UK public finances improved considerably in November, as the central government borrowed less, while more tax receipts were received. The Office for National Statistics said public sector net borrowing, which strips out state-controlled banks, totalled 14.1 billion pounds in November, down 10% from the previous year. The improvement was driven largely by less central government borrowing as tax receipts in November advanced by 5.5%, compared with the last year's data. Tax receipts in November were boosted mostly by an increase in indirect taxes including VAT, income tax and stamp duty, the ONS said. In addition to that, figures were boosted by payment of a 1.1 billion-pound fine by banks under a settlement with regulators, who investigated a foreign exchange rate market manipulation.

A separate survey showed British retail sales growth rose at the fastest pace in almost 26 years in December, largely driven by Black Friday discounts, according to the Confederation of British Industry. Around 71% of retailers said sales volume soared from the previous year, while 9% experienced a decline in sales, resulting in a balance of 61%, the Distributive Trades Survey showed. This was the highest score since January 1988. A balance of 35% of retailers predict overall sales volumes to increase again next month.

CAD

“The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.”

- Swiss National Bank

Canada’s consumer price inflation slowed in November, largely owing to falling gasoline prices. Canadian November inflation decelerated to 2%, after rising to 2.4% in October, Statistics Canada reported. The fresh data surprised to the downside, as economists had estimated a 2.2% pace. The Bank of Canada's core CPI, which strips out eight volatile components, dropped to 2.1%, down from 2.3% recorded in October, and against economists’ forecasts of 2.5%. The main contributor to cooling inflation was the decline in gasoline prices, spurred by weaker energy prices. Canadians paid 5.9% less at the gas stations in November on average over the past year, marking the lowest price levels since February 2011. The data reinforced BoC's concerns that lower oil prices are putting the Canadian inflation outlook in peril. Lower energy prices are projected to continue to have an impact on inflation figures in the near future.

In the meantime, a separate report showed Canadian retail trade remained relatively unchanged in October. Sales stayed at $42.8 billion, after soaring 0.8% in the preceding month, Statistics Canada said. Meanwhile, core retail trade, which strips out volatile automobile and parts sales, increased 0.2%, in line with market expectations.

JPY

“Weak demand alongside recent falls in commodity prices will weigh on inflation, triggering more easing by the Bank of Japan, perhaps as early as the spring”

- Capital Economics

The Bank of Japan kept monetary policy unchanged at its final meeting of the year, opting to assess the effects of the expanded stimulus programme, despite a sharp decline in global oil prices, which jeopardize the central bank’s attempts to reach 2% inflation. While economists expect that further monetary easing will be needed next year, the BoJ offered a more optimistic view on the nation’s economy.

As widely expected, the BoJ decided to keep its pledge to expand base money, or cash and deposits at the central bank, at an annual pace of 80 trillion yen via purchases of government bonds and risky assets. The Monetary Policy Statement showed that the Japanese economy has continued to recover moderately as a trend from the dampening effect of a sales tax hike in April. Prime Minister Shinzo Abe's decision to delay the next planned tax hike by 18 months to April 2017 is likely to provide more than enough time for demand to rebound. Regarding the economic outlook for Japan, the BoJ said the trend is likely to persist, but inflation will stay around 1% for some time. Inflation might pick up in the near term due to the lower value of the Japanese Yen, which has lost around 8% versus the US Dollar since the BoJ's October 31 meeting. The central bank also raised its views of exports, industrial production and housing investment in a detailed assessment.