Fundamental Analysis

EUR

"The strengthening of the exchange rate requires further monetary stimulus. That’s an important dimension for our price stability.”

-Mario Draghi, European Central Bank President

After Mario Draghi’s speech in the Washington DC, the toughest in his series ever, the single currency fell into a downward spiral, with EUR/USD loosing around 0.44% in the early morning European session. The most traded currency pair was changing hands around 1.3822, erasing some of the last week’s gains, when the pair advanced 1.33%. Draghi’s patience with the single currency has snapped. Last month we were making bets on when European officials will start talking down the Euro, as EUR/USD around 1.40 is a serious threat to the economy. It finally happened; the ECB’s President Draghi claimed that a further appreciation of the shared currency will trigger more fresh actions from the central bank. A 6% appreciation versus the U.S. Dollar during the last year threatened central bank’s ability to deliver inflation of just around the official target of 2%, as it would cheapen imports and hurt the region’s exporters. During the last policy meeting Draghi pointed out policymakers are already considering the implementation of the U.S.-style quantitative easing, after the key inflation rate fell to 0.5% in March, hitting the lowest in more than four years. Another ECB member, Jens Weidmann claimed that Euro’s appreciation was partly provoked by capital inflows, especially in the peripheral countries. According to the latest poll conducted by Bloomberg, the ECB will pull the trigger within two months. The ECB has made it clear, that it will enter the uncharted territory- cutting one of the benchmark interest rates below zero.

USD

“January and part of February were affected by weather. Now we are seeing things are bouncing going into spring.”

- Craig Dismuke, chief economic strategist at Vining Sparks

The world’s largest economy will accelerate in the second quarter. This is clear, as the U.S. economy is finally emerging from the weather-induced slumber, with retail sales for March significantly outpacing markets’ expectations.

A report from the Census Bureau unveiled sales at American retailers advanced 1.1% last month, outpacing expectations for a 0.8% gain and accelerating from February’s revised 0.7% increase. The main contributor to growth was a strong jump in purchases of motor vehicles and parts, as car sales soared 3.1% over the observed period. Car sales represents the largest part of individual retail segment, and even though they are considered to be highly volatile, excluding car sales, retail sales advanced 0.7%. This is the biggest monthly gain in more than a year and almost double the figure expected by economists. Both indicators inched higher for the second consecutive month. In the first quarter American shoppers purchased 2.5% more goods in the comparison with the same period a year earlier. Despite disappointing payrolls figures, stronger retail sales has definitely added to employment, bolstering the case the second quarter growth will be more impressive.

Despite optimistic data, the USD/JPY pair’s move above 102-mark was short-lived, suggesting traders are waiting for other confirmations of economic recovery.

GBP

“There’s a good chance through the summer months the market will start to consider a Bank of England rate move sooner rather than later”

- Derek Halpenny, head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd.

The cable moved lower on Monday, easing back below the 1.67-mark, as the week ahead will offer a lot of incentives on both sides– from the U.K. and the U.S. to provide direction for one of the most traded currency pairs.

The week will be full of fresh catalysts, including Tuesday’s CPI report, which is projected to show further decline in consumer prices, moving further below the 2% official target. Regarding the labour market, the employment data is expected to generate positive momentum in the cable, as companies will hire more staff even despite harsh winter conditions. On the one hand, strengthening in the nation’s labour market will add more pressure on the Bank of England to start raising rates, while on the other, falling inflation provides more room for a manoeuvre.

Sooner or later the central bank will have to act, as domestic economy is picking up. Futures investors’ bets the Sterling will rise against the greenback hitting a three-year high, as the U.K. property market is escalating speculation Carney will pull the trigger sooner-than-expected. Earlier this month the IMF has already raised its growth outlook for the U.K. The gap in the number of wagers by hedge funds on a climb in the Pound compared with those who expect a decline stood at 46,477– the highest since February 2011.

JPY

“Of course we're making steady progress toward meeting our 2 percent inflation target, but we're only half way through. That's why we will continue to steadily proceed (with the current ultra-loose policy) and will adjust monetary policy without hesitation if achievement of our price target is threatened.”

- Haruhiko Kuroda, BoJ Governor

Last week's comments from the Bank of Japan provoked a massive sell-off of USD/JPY, as investors rushed to buy the Yen following the BoJ meeting, where policymakers said no additional easing was on the schedule. On Friday, however, the Dollar regained some of the earlier lost positions, climbing 0.18% against the Yen after upbeat producer prices and consumer sentiment.

While Kuroda tried to make it clear the central bank is comfortable with the current stance of the monetary policy and they are ready to act if necessary, there are some worrying signs that are raising concerns the Governor still have some doubts. This month the Governor will revive his regular meetings with the Prime Minister Shinzo Abe, according to people familiar with the matter. It means that the government can be concerned about the recent stock market declines and the strengthening of the Yen. Kuroda has been, perhaps, overconfident about the current economic conditions, as some reports suggested the economy was not ready to withstand the tax hike. Shinzo Abe’s cautiousness, however, add to speculation we can see more actions soon. The Japanese Yen advanced 3.4% this year, while Tokyo stocks retreated 14% after rocketing 50% last year. Such a performance suggests investors are concerned that falling consumer confidence will derail the economic recovery, while tax hike will leave them with less cash to spend.

AUD

"While the decline in the exchange rate from its highs a year earlier would assist in achieving balanced growth in the economy, this would be less so than previously expected given the rise in the exchange rate over the past few months”

-RBA minutes

The Australian Dollar traded slightly lower on Tuesday versus other major currencies, with AUD/USD sliding back to 0.9394 and EUR/AUD rising to 1.4719 after the release of the RBA minutes.

As it was widely expected, minutes only reaffirmed central bank’s neutral bias and pointed out further signs that a period of stable interest rates is vital for rebalancing economic activity. During the last meeting the RBA left its key refinancing rate at 2.5%. Minutes showed that policymakers’ view that the most prudent course of the monetary policy was likely a period of stability in interest rate. What is more important, the minutes showed the RBA sees a slight improvement in the labour market, while conditions still need to improve further before the jobless rate starts to decline on a steady pace. The meeting was held before March unemployment was unveiled that showed the indicator fell to 5.8% from 6.0% a month earlier. At the same time, amid a drop in the mining sector, there were noted promising signs in other parts of the economy, including stronger dwelling investment and signs of a pickup in domestic consumption. A 10.5% surge in housing prices over the last year also suggests the property market can become one of the main drivers.

While the economy is building up steam, some can claim the time has come to raise borrowing costs, however, the RBA has made it clear they are not in any hurry to make a rate hike.

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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