Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"We like selling SEK, where a traditional rate cut is still possible, but are more cautious on EUR shorts, as the ECB faces a more limited set of tools to weaken the currency”

-Morgan Stanley

Amid a lack of fundamental data due to the Easter holidays, this week’s main highlight for the Euro will be Mario Draghi’s speech during the conference in Amsterdam. The single currency gave back earlier gains against the greenback, as investors welcomed positive data from the U.S., and were awaiting Mario Draghi to appear in public and shed light on future moves of the monetary policy. Last time he made it clear the central bank is ready to combat persistently low inflation and sluggish growth. Moreover, he noted that further appreciation in the Euro will trigger immediate monetary easing. Investors are currently betting the ECB will pull the trigger in June, however, markets are preparing for a massive selloff already now, as more than 66% of opened positions are short. The most traded currency pair is likely to find solid support at 1.3673, the low seen on April 4. The current situation looks like an old saying– the chicken and the egg– will Mario Draghi’s hand be forced by investors’ pressure, or traders will give up on waiting for fresh actions?

At the same time, the latest reports are sending promising signs, as consumer confidence in the 18-nation bloc rose 0.6 points on a monthly basis to –8.7 this month, outpacing market’s expectations. For the overall EU the gauge of consumer mood climbed by 0.8 points to –5.8.

USD

“Buffeted by a very rough winter, sales grew at fewer firms during the first quarter. Strong expectations for increased growth over the course of 2014.”

- Jack Kleinhenz NABE President , Chief Economist at the National Retail Federation

The latest fundamental data from the world’s largest economy was mixed, as inflation and retail sales picked up more than expected, while figures from the labour market disappointed markets. Moreover, Janet Yellen seems to be lost in her own projections, citing the ongoing economic recovery, and, at the same time, warning that harsh winter had stronger-than-expected effect on the economy. Keeping it all in mind it is difficult to predict the future performance of the greenback, however, this week the buck is likely to receive a strong bullish bias from durable goods orders that will be released on Thursday. Economists, however, are still confident about the future prospects of the U.S. economy.

The latest poll conducted by the National Association for Business Economics showed that American companies will pick up again in the nearest future, while the worst of the harsh weather is over now. A majority of companies, however, mentioned that winter’s brutal weather took a toll on domestic demand, resulting in a disappointing first quarter’s growth. Businesses are still confident about strong demand, saying sales will grow, with the growth outlook being less widespread than three months ago. In contrast, the number of companies reporting on higher profit margins declined slightly as well. Despite mixed figures, more than 80% of respondents believe the real growth will stand around 2% this year, while 72% believe the growth will hover between 2% and 3%.

GBP

“These results are an important confirmation of the domestic recovery and are a welcome sign that improving economic conditions are beginning to extend from big corporations to SMEs”

- Christina Hamilton, managing director of Western Union Business Solutions

Britain’s economy is now one of the fastest growing developed economies in the world. Earlier, it was believed that the growth is mostly led by a heating housing markets and a steep decline in the savings rate. The latest quarterly research from Western Union Business Solutions found out that the nation’s small and medium-sized companies believe the domestic trader is single-handedly boosting economic recovery. According to a research almost 40% of companies expect trade with European countries to recover during the next 12 months, after activity with all other major markets declined sharply in the final quarter of 2013. While stronger demand and overall economic improvement in Europe helped to improve the trade balance, British companies are concerned about the strength of the Pound, as further appreciation will have serious effect on the businesses. During the last eight years, the Sterling has climbed 8%, while hawkish comments from the Bank of England and Mark Carney’s unconvincing comments only fuelled speculation about the upcoming rate hike. Another finding is the fact that only 57% of the small and medium sized companies bought goods and services from Europe, compared with 59% a quarter earlier and 74% at the beginning of 2013. It means that British companies are willing to do business with domestic companies, rather than operate with their neighbours. It is a worrying sign, as economy is highly dependent on its local customers, while recovery cannot be considered as balanced until the ONS reports constantly stronger exports.

JPY

“Consumers are likely to rein in spending in the wake of this month's consumption tax hike, which should reduce import demand”

- Marcel Thieliant, Japan economist at Capital Economics

One of the key pillars of Shinzo Abe’s Abenomics was a significant depreciation of the Japanese Yen, as, in theory, it should provide a substantial boost to the domestic exporters, hence, contributing to growth. In reality, however, an increase in exports was not able to outweigh the surge in the amount of imported goods and services, resulting in the largest ever trade deficit in March.

The Ministry of Finance said the trade gap quadrupled on a annual basis, hitting 1.45 trillion yen in March, up from 356.9 billion in the same month a year earlier. Shipments from the third largest economy climbed only 1.8% to 6.38 trillion yen, mostly due to higher exports of cars and fuel products. In contrast, imports rocketed 18.1% to 7.83 trillion yen on the back of higher imports of crude oil and liquefied natural gas. The economy is highly dependent on the energy imports as all Japanese nuclear reactors were closed following the disastrous earthquake and tsunami 3 years ago. The increase in imports was attributed to a stronger demand ahead of the April’s sales tax hike that has been increased to 8% from 5%, while politicians are planning to make another hike in October 2015, when the tax will reach 10%. The Yen was almost 9% cheaper against the greenback in March, compared with a year ago, however, such a decline was not able to provide a boost to exports. Imports are projected to decrease in the coming months due to the sales tax hike and potential reopening of nuclear reactors.

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

It was surprisingly how just after a couple of promising reports the Reserve Bank of Australia switched to a neutral or even slightly hawkish bias. Such a shift in the sentiment provided a strong boost to the Aussie, pushing AUD/USD back into the “uncomfortably high” zone, with the pair hitting 0.9461 on April 10, the highest since November 2013.

The labour market was one of the biggest concerns for the central bank, however, the latest figures showed the unemployment rate unexpectedly fell to 5.8% in March from a revised 6.1%. It was the biggest monthly drop since August and above markets' expectations. What is more important, the number of people employed soared by 18,100 over the period, climbing after a revised 48,200 a month earlier. Nevertheless, the economy is still far away from operating around its full capacity and there is no time for complacency.

That is why the nation’s Treasurer Joe Hockey expressed his concerns about the RBA’s inaction over the Aussie’s rally, also saying the change of stance with regard to the monetary policy has angered him and other government colleagues. While Australian politicians appreciated RBA’s concerns about constantly rising property prices, they consider the recent change to a neutral policy setting as the main reason for another jump of the local currency.