Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Even if the eurozone does imminently exit deflation, it may still prove to be a hard slog to get eurozone consumer price inflation back up to the ECB’s target rate of “close to, but just below 2pc”

-Howard Archer, IHS Global.

Factory prices in the Euro zone’s number one economy rose modestly in March from February, but dropped for the 20th consecutive month, when measured on an annual basis. The PPI is considered as a proxy of consumer price inflation, as manufacturers pass on their cost increases or savings to their ultimate customers. The headline annual Producer Price Index slid 1.7% in March in a sign the European Central Bank’s aggressive asset purchases have not yet inspired confidence in German manufacturers to raise wholesale prices. Analysts, however, had expected a 1.6% decline. On a monthly basis the gauge rose 0.1% in March, after climbing 0.1% in the previous month, while economists had called for a 0.2% increase. Energy prices continued to influence producer prices in March. They remained unchanged from the previous month, but declined 4.7% from March 2014. Excluding energy prices, which can be volatile, producer prices rose 0.1% on the month and decreased 0.5% on the year in March.

Last week, the data showed German consumer prices accelerated growth on an annual basis in March, a sign the danger of Germany falling into a precarious deflationary spiral seemed no longer imminent. Inflation in the Euro zone’s largest economy climbed 0.3% year-on-year during in the reported month, following the 0.1% uptick seen in February.

USD

“The timing of normalization remains uncertain because how the economy evolves is also uncertain,

-William Dudley, New York Federal Reserve President

The timing of the first US interest rate hike in a decade continues to depend on economic performance, according to New York Federal Reserve President William Dudley. In comments, Dudley repeated cautious optimism that the world’s biggest economy will continue to grow and that inflation will begin to firm later this year. While the US economy has further to reach the Fed’s dual mandate of full employment and 2% inflation, the data will "hopefully" support a rate hike later this year, Dudley said. The Fed is expected to raise rates by June at the earliest but more likely in the second half of the year, according to forecasts by economists and Fed officials.

Meanwhile, US consumer sentiment rose more than expected in April to the second-highest level in more than eight years as Americans were more optimistic about the economic outlook and inflation. The University of Michigan said that its preliminary index of sentiment rose to 95.9 this month from 93 in March. The survey's sub-index on business conditions climbed to 108.2 from 105.0 in March, reaching the second-highest level since January 2007, while a reading on consumer expectations rose to 88.0, up from 85.3. Americans expected an inflation rate of 2.5% in the next year, the lowest level since September 2010, and down from 3% in the previous month.

CNY

“The size of the cut is more than expected”

- Chen Kang, analyst at Shenwan Hongyuan Securities

The People's Bank of China announced that it cut the level of funds that commercial banks must hold in reserve by one percentage point. The central bank lowered the amount of deposits it requires banks to hold as reserves to 18.5% from 19.5% effective April 20, unleashing a substantial amount of cash into the economy. The decision came after official data showed that China’s economy grew 7.0% in the first quarter, the slowest pace since the global financial crisis in 2008. Data on industrial output, retail sales and fixed asset investment also came against economists’ expectations, indicating that China’s officials need to act to prevent a further slowdown. While most analysts had predicted some sort of easing of the reserve ratio, the cut appeared to twice as big as usual. The PBoC last slashed the RRR for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012. The central bank has also cut interest rates twice since November in an attempt to lower borrowing costs and underpin demand. Yet, while short-term money rates have declined in recent weeks, long-term lending to the real economy has shown little sign of reaction.

Moreover, in a statement, the PBoC said it will provide an additional one-percentage-point RRR cut to banks for agricultural services and a further two-percentage-point cut to the Agricultural Development Bank of China.

NZD

“It keeps the Reserve Bank on hold for longer, and an imminent threat for prompting a rate cut is more around the currency at this particular stage”

- Nick Tuffley, ASB chief economist

New Zealand annual rate of inflation fell to the lowest level in 15 years in the first quarter, reinforcing the view that the Reserve Bank of New Zealand may consider lowering its interest rates later this year. The consumer price index climbed 0.1% from the previous year, the smallest gain since the third quarter of 1999, according to Statistics New Zealand. Economists, however, had called for a 0.2% increase. Measured on a quarterly basis, cost of living dropped 0.3% from the three months through December, the second consecutive negative quarterly reading. The quarterly decrease in the CPI was driven by an 11% decline in petrol prices.

Tepid inflation adds to signs Reserve Bank of New Zealand Governor Graeme Wheeler can keep the official cash rate unchanged at 3.5%, while some analysts bet the Governor will lower borrowing costs before the end of the year. Last month, the RBNZ signalled it did not plan to raise rates until at least early 2017 as it faces a prolonged period of inflation below the bottom of its 1%-3% target range. The RBNZ has kept its cash rate at 3.5% since last September. The New Zealand economy is expected to grow around 3% annually for the next couple of years and the RBNZ's March statement predicted inflation gradually climbing to the middle of its target band around the end of 2016.

CAD

“That amount (of rate cut) seems to be about right to restore our track for the Canadian economy for the next year or so and to get the output gap to close late 2016”

- Stephen Poloz, Bank of Canada Governor

Bank of Canada Governor Stephen Poloz said the January interest-rate cut appears to have helped to put the nation's economy back on track amid rebounding crude prices, and added the biggest risk to the outlook may be outperformance of the world’s number one economy. Poloz became the first Group of Seven central banker to ease monetary policy in response to the sharp decline in oil prices, slashing the key rate in January to 0.75%. Poloz called it “insurance” against the effect of the downturn. In the aftermath of the surprise decision to slash the benchmark interest rate, bets on another cut this year surged. Though expectations fell as the central bank signalled more confidence in the economy and as prices for oil, a major Canadian export, stabilized and recovered partially, the market was still betting on a 35% chance of a rate cut in July. Poloz, however, said the BoC must consider the possibility that oil could renew its downward trend.

The biggest "risk" to the bank's outlook is the possibility the US economy will expand faster than expected, he said, noting that it would be a positive risk as strong US demand would stimulate Canadian economic growth. Poloz also said he would view a possible US Fed’s rate hike positively as it would be in the context of assured US economic momentum. However, the Bank of Canada must still monitor inflation.