Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Private spending is a key driver for economic growth this year. However, existing risks still must not be forgotten”

- GfK

Consumers’ morale in Germany reached the highest level since 2001, as optimistic economic outlook and low inflation persuaded consumers to open their wallets. The GfK consumer sentiment gauge rose to 10.2 in May, up from 10.1 in the preceding month. Also, consumers' economic expectations rebounded in May, rising 3 points to 38.3 points, GfK said. Consumer spending in Germany overtook exports as the country's economic growth engine, in line with a constantly strengthening labour market and rising incomes making consumers willing to spend lavishly. Yet, GfK’s sub-index measuring personal income expectations slightly declined in May amid rising energy prices and expectations of higher inflation.

Meanwhile, consumer confidence in the Euro zone’s second biggest economy, France, dropped slightly in the current month, according to INSEE. The gauge eased to 93 in May, down from 94 a month earlier, snapping a steady period of increases started last October. Consumers' assessment of their recent financial situation also deteriorated slightly. The monthly report also indicated that fears of unemployment declined. Fewer households surveyed said prices have risen recently, but inflation expectations climbed in May, Insee added. The index hit an all-time low of 79 in May and June 2013, while the highest level of 125 was reached in January 2001.

USD

“What I've said is that a case might be strong in June. I still think that's possible. But as I said, I haven't made up my mind about June”

- Jeffrey Lacker, president of the Richmond Federal Reserve Bank

Vice Chairman of Federal Reserve Stanley Fischer noted during his speech in Israel that there is too much importance placed on the first hike of federal fund rate and the process of returning back to the pre-crisis level will take some time. Since the markets expect raising the rate in September, Fischer said it will be driven by data and not by date. Fischer said that the US central bank might push back the timing of the interest rate hike if slower-than-expected foreign growth affects the US economy. The Fed’s Vice Chairman predicts the interest rate will range between 3.25% and 4% by 2017-2018. He also highlighted that the Fed cannot act as the world’s central bank, and must first and foremost seek US domestic goals of maximum employment and stable prices.

Another FOMC voting member, president of the Richmond Federal Reserve Bank, Jeffrey Lacker, in his Tuesday’s speech said that he has not still decided on his voting on June’s FOMC meeting about increasing the Fed’s interest rate that has been maintained at a record low of 0% to 0.25% since December 2008. However, with inflation firming and the economy recovering from a soft growth in the first quarter, there may still be a case for hiking interest rates next month, he said. Lacker also addressed Lacker two main problems in the US financial system: namely, the Fed's emergency lending powers and Title II of the Wall Street Reform Act of 2010.

CAD

“After the extreme drama early this year, Bank of Canada policy has settled back into a mundane routine”

- Douglas Porter, Bank of Montreal chief economist

The Bank of Canada maintained its target for the overnight rate at 0.75% for a third consecutive meeting, underscoring that growth and inflation are in line with expectations. Most economists now expect the bank to hold the line on interest rates for a while unless economic conditions deteriorate significantly. Consumer inflation is near the bottom of the central bank’s 1%-3% target range, largely due to the transitory effects of considerably lower energy prices. Seeing through a number of temporary factors, the BoC estimates that the underlying trend of inflation is 1.6%-1.8%, consistent with persistent slack in the economy. While a weak first quarter in the US, Canada’s main trading partner, questioned economy’s strength, policy makers expect a return to robust growth in the June quarter. This will spur the rotation of demand in Canada toward more exports and business investment. Recent indicators point to consumption in Canada remains solid, given the impact of lower oil prices on gross domestic income, the BoC said.

Also, the central bank expressed its concerns about the Canadian Dollar’s recent rally amid a slew of encouraging economic data and crude oil prices, which have jumped 40% this year since their January lows. The BoC signalled the Loonie and its recent rally might be a potential source of damage to growth of Canada’s export-oriented economy this year.

JPY

“Consumption is picking up but the momentum is weak”

- Takeshi Minami, chief economist at Norinchukin Research Institute

Japan’s retail sales rose less than expected in April compared with the previous year, suggesting a weak start to the second quarter for an economy that is struggling with a devastating effect of last year’s sales-tax hike. Sales increased 0.4% from March, when they declined 1.8%, whereas economists had expected a 1.1% gain. Measured on an annualized basis, retail sales soared 5.0% in the reported month, albeit the on-year jump was largely due to weak figure in April 2014. Nonetheless, it was the first increase in four months and came after the 9.7% decline in March. The 2014 sales-tax hike pushed Japan's economy into recession after household and business spending plummeted. Economists are closely watching retail sales for hints that consumers started spending more again. The world’s third biggest economy managed to rebound from the slowdown, and grew at the fastest pace in a year in the first quarter. Yet, economic growth is seen slowing to an annualized 2.1% in the second quarter from expansion of 2.4% in the March quarter. The strength in the beginning if the year was supported partly by inventory build-up, which may constrain production in coming months. A second sales tax hike looming in 2017 also casts doubt on whether the recovery can be sustained long enough to push inflation toward the 2% target. The BoJ revised up its assessment of the economy last week amid signs of a pick-up in private consumption, signalling that it has no plan to step up additional stimulus any time soon.

AUD

“This data is so bad it would worry the RBA and now raises the risk they cut rates again ahead (but probably not until after second quarter CPI)”

- UBS

Dismal capex data raised concerns that Australia’s transition from a mining-led economy offers nothing but hard landing, spurring bets the Reserve Bank of Australia may cut its official interest rate again soon. Capex is one of the most important figures for the interest rate outlook, with the central bank relying heavily on a growth in non-mining investment to offset the expected decline in mining investment currently underway.

According to the Australian Bureau of Statistics, March-quarter capex plunged 4.4% to $35.9 billion over the first three months of 2015 on a seasonally adjusted basis, and 5.3% on the year, reaching recessionary levels. Plant and equipment investment declined 0.5% in the March quarter while spending on buildings and structures plummeted 6.5%. The most important part of the report, 2015-2016 expected capital expenditure, came in at $104.033 billion, considerably below expectations for a figure above $110 billion. Initially, the first estimate had been reported at $109.799 billion. The capex data provided some discouraging news for the RBA, with the drop-off in mining investment steeper than already weak forecasts, manufacturing continuing to fall and the services sector faltering.