Daily Forex Fundamental Overview

Fundamental Analysis

Key highlights of the week ended July 24

Australia

RBA Governor Glenn Stevens said an interest-rate cut remains "on the table," while adding that the depreciation of the Aussie Dollar is having an expansionary effect on the nation's economy. The Australian Dollar has declined from above parity with the US counterpart in 2013 to around $0.75 recently, but has fallen less on a trade-weighted basis. The RBA lowered borrowing costs twice this year to a historic-low 2% as it aimed to accelerate a transition toward service industries and manufacturing as a decade-long mining boom fades. However, the easy policy is fuelling a housing bubble in Sydney and Melbourne. Hence, the central bank would prefer a weaker currency to boost the competitiveness of local industries.

Euro Zone

Athens took another crucial step towards a bailout after parliament approved a second set of reforms that was demanded by Greece's creditors. The passage of the measures means that talks on an 86 billion euros bailout can begin. The reforms include changes to Greek banking system and an overhaul of the judiciary system. Earlier on Wednesday, the European Central Bank approved another 900 million euro in ELA for Greek banks. Yet, lenders are still subject to strict capital controls. Meanwhile, S&P's upgraded Greece's sovereign credit rating to CCC+ from CCC– and revised the country's outlook from negative to stable. S&P said it believes the possibility of Greece exiting the Euro zone by 2018 has declined to less than 50%, but the risk "is still high", particularly if Athens does not successfully implement the rescue programme.

New Zealand

The RBNZ cut interest rates for the second time in six weeks and hinted further easing will likely be needed to underpin inflation as growth slows. Central bank Governor Graeme Wheeler is trying to stoke inflation from near zero to 2% goal as plunging dairy prices curtail export returns and farmer spending. Thus, economists now expect the RBNZ to proceed with cutting the official cash rate in the near term to help jumpstart consumer inflation while cushioning the nation's economy from a precipitous decline in dairy prices, New Zealand's main export.

UK

BoE policy makers voted unanimously in July to hold the central bank's key interest rate unchanged. Yet, their unanimity masks increasingly lively discussions over the timing of interest rate hike. Minutes of the MPC’s July policy meeting showed all nine members of rate-setting board voted to keep the benchmark interest rate at a record low of 0.5% and leave the central bank's bond portfolio at 375 billion pounds. The time for an interest rate hike is approaching and it is "highly likely" that rates will continue to rise over the next few years, BoE policy maker David Miles said. Miles also added that the key issue for the BoE was judging the moment at which diminishing slack in the UK economy and increasing cost pressures warrant raising rates from their record low 0.5%. Investors are doubtful, however, that a rate lift will command majority support until early 2016.

EUR

“Eurozone economic growth lost only slight momentum in July amid the rollercoaster events of the Greek debt crisis during the month. The rate of expansion remained reassuringly robust to suggest that it was by-and-large 'business as usual' for the region as a whole.”

- Chris Williamson, chief economist at Markit

The Euro zone’s manufacturing sector failed to make progress in July amid the Greek debt crisis during the month, preliminary data from Markit showed. The flash manufacturing PMI for the Euro area came in at 52.2 in July, down from 52.5 in the prior month. The German manufacturing sector faced a slight decline in the pace of growth, with the corresponding reading falling to 51.5, compared with June’s final 51.9 points. At the same time, business activity in the French manufacturing sector slowed, as the PMI slid to 49.6 in the reported month, down from 50.7 reported in June and below expectations of 50.8.

Meanwhile, the Euro zone’s services sector continued to enjoy a robust activity, albeit at a slightly slower pace compared to the previous month. The region’s services PMI reading booked 53.8 points in July, down from 54.4 in June. The German services sector appeared to be on a slightly weaker footing in the measured month, sliding to 53.7 points, down from the 53.8 reading in June. The flash services PMI in France came in at 52.0 in July, compared to the 54.1 seen a month earlier and overshooting analysts’ expectations, who had called for a 53.8 result. Consequently, the closely-watched composite PMI for the Euro area came in at 53.7 points, compared to 54.2 in June. Market watchers had expected a 54.0 result.

USD

“We see no reason to change our view that housing activity is on an upswing”

- John Ryding, chief economist at RDQ Economics

US new home sales dropped to their lowest level in seven months in June, while May’s data was revised sharply lower, indicating a minor setback for the housing market rebound. Sales of newly built homes plunged 6.8% in the reported month from May to a seasonally adjusted annual rate of 482,000, the lowest level since November 2014, according to the Commerce Department. Economists, however, had expected a rate of 550,000. In May, sales declined 1.1%, compared with an initially reported 2.2% rise. New home sales make up only 8.1% of the housing market and are notorious for a high volatility on a monthly basis. The broader trends indicate the new-home market is gaining traction along with the overall housing sector. Measured on an annual basis, new home purchases surged 18.1% from the previous year. Sales averaged an annual rate of 512,000 in the first half of 2015, compared with an average of 440,000 for all of 2014.

In a separate report, Markit said business activity in the US manufacturing sector rose in July, rebounding from the lowest level in almost two years reached in June. US manufacturing PMI edged higher to 53.8 this month, up from 53.6 in June. Yet, manufacturers admitted that investment spending cuts in the energy sector continued to weigh on sales.

CNY

“It means that the industrial sector has not yet found its footing”

-Jacqueline Rong, an economist with BNP Paribas

China’s manufacturing activity plunged to the lowest level in 15 month in July, adding to the latest signs of deterioration in the world’s second biggest economy. The preliminary reading of the Caixin China Manufacturing Purchasing Managers’ Index dropped to 48.2 this month, compared with the final June’s gauge of 49.4. A reading above the key 50-mark threshold shows that the sector expands, while below points to contraction. Sub-indexes for output, new orders, new export orders and employment all showed decreases during the reported month. The factory output sub-index dropped at a faster rate, falling to its lowest in 16 months. Yet, the preliminary version released Friday is based on 85-90% of responses from factories. The final version is due August 3.

The weaker-than-expected reading suggests that the Chinese economy has yet to regain traction despite several rounds of interest rate cuts, higher spending on infrastructure and signs that the real-estate market is emerging from a slump. It is also likely to further cast doubt on the 7% growth Beijing reported for the second quarter as other readings, from industrial output to investment in factories and buildings, showed persisting weakness. Since November the People's Bank of China has slashed interest rates four times, and has lowered the Reserve Requirement Ratio for banks twice, and a third time for banks that lend to certain sectors where the government is trying to boost growth in, such as agriculture.