Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“We see some stabilization but I don’t see any reason for enthusiasm”

- Jens-Oliver Niklasch, a fixed-income strategist at Landesbank Baden-Wuerttemberg

German business morale unexpectedly improved in November, suggesting the Euro zone’s number one economy is gradually regaining its footing after struggling to grow in recent months. According to the Ifo Institute, the headline Business Climate Index, based on a survey of 7,000 executives, climbed to 104.7 compared with 103.2 a month earlier. The Current Assessment sub-index came in at 110 points following the previous month’s reading of 108.4. In addition to that, the Ifo Expectations Index, indicating companies’ projections for the next six months, rose to 99.7 up from 98.3 in October. The report suggested that an easing of geopolitical tensions in Ukraine and other parts of the world, which affected sentiment in the summer and early autumn, would help to boost German exports and investment.

Meanwhile, ECB policy maker Ewald Nowotny said that the first quarter of 2015 would be too early for the central bank to take further steps to fuel the Euro bloc’s economy. Nowotny also praised the latest extraordinary measures by the ECB, including rate cuts, ABS purchases and TLTROs, and noted that it would take some time for them to materialize in the real economy. The next official meeting of ECB is due to take place on December 4, with the central bank expected to keep rates unchanged and maintain its dovish tone.

USD

“A fifth-consecutive monthly slowing in growth in the service sector adds to signs that the economic upturn has lost considerable momentum, though it’s important to note that the pace of expansion remains robust by historical standards”

- Chris Williamson, chief economist at Markit

Business activity in the American services sector rose this month at a slower pace than in October as growth in new business slowed. According to the financial data provider Markit, flash services PMI came in at 56.3 in November, the lowest level since April, following final October’s reading of 57.1. The growth rate has moderated steadily since hitting this year-high at 61 in June, but is still above the 50-mark threshold that indicates expansion in economic activity. The services sector new business sub-index dropped to 55.9 compared with the final 57.8 reading in last month. The employment sub-component, however, showed strength coming in at the highest level compared to final readings since June.

Markit's flash composite PMI, a weighted average of manufacturing and services indexes, declined to 56.1 in November, down from 57.2 in October, with the employment sub-index also improving. In a separate report from November 20, Markit said that manufacturing activity across the country in November expanded at the slowest pace in ten months, sapping optimism over the resilience of the world’s number one economy. The preliminary manufacturing PMI dropped to a seasonally adjusted 54.7 this month down from a final reading of 55.9 in October. Analysts, however, had expected the index to rise to 56.3 in November.

JPY

“To achieve the price stability target, the BOJ has been taking 'action' and will continue to do so”

-Haruhiko Kuroda, BoJ Governor

On October 31 the Bank of Japan unexpectedly increased the size of its monetary-expansion programme from 60-70 trillion yen per year to 80 trillion yen, attempting to bring consumer-price inflation to 2% and end the deflationary threat which has hampered growth in the economy for the past 15 years. On Tuesday, the BoJ Governor Haruhiko Kuroda defended the decision and stressed the central bank stands ready to deploy more stimulus to meet its inflation goal. Nevertheless, the minutes of the latest BoJ board member meeting showed four policy makers expressed concerns that expanding quantitative easing could do the economy more harm than good. Thus, the surprise announcement of extra stimulus on October 31 was approved by the narrowest majority, with five of nine members having been in favour of doing more. Those, who were against expanding QE programme, argued the effects of stimulating the economy and inflation would not be large, while fresh action could instead further distort bond and money markets’ functioning. Nevertheless, Kuroda stands firm that easing was necessary to ensure that Japan’s public shakes off its “deflationary mindset”, as well as prompt companies to start investing and employing more amid expectations that prices will increase. The recent BoJ’s decision pushed the Yen lower, with the weak currency benefiting exports, but hurting households and non-manufacturers by raising import costs.

CNY

“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely”

- China’s government think-tank

People’s Bank of China and the Chinese government are ready to slash interest rates again as well as loosing lending restrictions, as they are getting increasingly concerned that falling prices might prompt a surge in debt defaults, business failures and job losses. The authorities are also worried about China’s economic growth rate, as growth slowed to 7.3% in the third quarter and the nation’s economy is seen expanding around 7% in 2014, well below the official projection of 7.5%. Moreover, the fear of a increasing unemployment rate could be also behind the potential decision to support the economy with lower borrowing costs. Last week the PBoC unexpectedly cut its one-year lending rate by 40 basis points to 5.6% and the one-year deposit rate by 25 basis points to 2.75%.

Many Chinese economists had been urging policy makers to deploy bolder policy actions, as recent fundamentals showed the economy losing more steam in the fourth quarter and consumer price inflation declining. Government think-tanks, which make policy proposals, have also prompt Beijing to revise its economic growth goal next year, probably to around 7%, from 7.5% this year. The leadership is scheduled to map out economic and reform plans for 2015 next month, including economic targets which will be unveiled in parliament next March.