Fundamental Analysis

EUR

“This speech certainly increases the chances that we could see sovereign bond purchases in Q1”

- Christian Schulz, Berenberg bank economist

European Central Bank Vice President Vitor Constancio said that the central bank is set to purchase government bonds early next year should policy makers ponder that more decisive measures are needed. The ECB is already buying covered bonds and bundled loans known as asset-backed securities. The central bank aims to expand the size of its balance sheet to the levels of early 2012, meaning around 1 trillion euros higher than it is today. If the ECB purchases sovereign debt, using the capital key, it means German bunds would be the main target. Roughly 18% of any money spent would go on German Bunds, 14% on French bonds and 12% and 8% on Italian and Spanish paper, respectively. Nevertheless, the ECB’s Governing Council is split on either the need for further stimulus or the design of purchases. Bundesbank President Jens Weidmann said on November 24 that there are “high legal hurdles” to buying government debt.

Constancio’s comments came days after ECB President Mario Draghi informed financial markets that the ECB was losing patience with the extremely low levels of inflation and was ready to do more. Annual Euro zone inflation came in at 0.4% in October, far below the ECB’s goal of just below 2%. Many analysts forecast inflation to slow to 0.3% in November, with the official data due on November 28.

USD

“This will help calm dovish Fed policymakers’ concerns over disinflationary pressures, but will stir the emotions of hawks”

- Credit Agricole

For the first time since early September initial unemployment claims broke above the 300,000 threshold, rising to a seasonally adjusted 313,000 in the week ended November 22, but the underlying trend remained consistent with a strengthening labour market. The four-week moving average of claims, considered a better gauge of labour market trends as it strips out weekly volatility, remained below 300,000 for an 11th consecutive week, adding to signs that the job market was improving. Continuing claims came in at 2.316 million, compared with last week’s revised reading of 2.333 million. Meanwhile, the Fed’s closely looking gauge of inflation rose 1.6% on annualized basis, while on a monthly basis core PCE Price Index inched higher 0.2%, meaning that consumers are buying goods and services, thus stimulating the economy. In October, consumer spending, which accounts for more than two-thirds of US economic output, rose 0.2% after being flat a month earlier, the Commerce Department said. Low gasoline prices as well as a firmer labour market are bolstering consumer spending, which should help to shield the economy from slowing growth in China and the Euro zone, as well as a recession in Japan.

Also, a separate report showed core durable goods surprisingly declined for the second consecutive month in October, dropping 1.3% following the same magnitude fall in September.

GBP

“This remains a domestically centered recovery, though a relatively broad-based one across the private sector”

- Ross Walker, an economist at Royal Bank of Scotland Group

The British economy continues to rely on domestic spending, which drove the nation’s economic output to a seventh consecutive quarter of expansion. Household spending climbed 0.8% in the three months through September, the most since the second quarter of 2010, according to the Office for National Statistics. The second official estimate of third-quarter GDP showed no revision to the quarterly growth of 0.7%. On an annual basis, the UK economy grew 3%, also unrevised from an earlier estimate. On the negative side, business investment decline of 0.7%, the first drop in more than a year, and exports fall of 0.4% weighed on the economy in the third quarter. Economists said weak growth in the Euro zone suggested that exports would remain weak for a protracted period. Given the heightened external menace to the British economy, the BoE is expected to raise its key interest rate in the mid-2015. The British economy is now 3.4% above its previous peak in 2008 compared with 7.8% for the US, 9.2% for Canada and 3.1% for Germany.

A separate data by the CBI showed retailers were feeling optimistic in the run-up to the Christmas trading period. 44% of businesses reported sales growth in November compared with 17% that registered a drop. While the resulting balance of 27% was slightly below forecasts, most retailers said they expected sales to increase strongly next month.

JPY

“We don't ease policy each time (economic and price) growth undershoots our expectations”

- Sayuri Shirai, BoJ board member

After plunging 14% since mid-year, the Japanese Yen’s drop is about to stop, the former Minister of Finance Eisuke Sakakibara said. He believes that the nation’s currency is unlikely to hit its low of 124.14 per Dollar in the run-up to the financial crisis in June 2007. The Yen fell to the lowest level in seven years of almost 119 last week after more than one year of massive monetary easing by the Bank of Japan. Sakakibara also highlighted that the Japanese economy is not that weak despite the fact that negative impact of April’s sales tax appeared to be prolonged. Thus, eventually, the tax increase will loosen its chocking impact on the world’s third biggest economy and the Yen will start strengthen.

Meanwhile, Sayuri Shirai, the BoJ board member, underlined importance of the recent surprising BoJ’s move of expanding monetary stimulus. Having deployed extra stimulus, the central bank showed its determination to reach the targeted price level and strengthen its credibility, but also can remain now in a wait-and-see mode to assess to what extent the move will bolster the nation’s economy and prices. In addition to that, Shirai also signalled that additional monetary easing was not necessary in the near term. Shirai also encouraged companies to help Japan combat deflation by raising wages and capital expenditure.

NZD

“The economy is growing, but the pace is moderating”

- Shamubeel Eaqub, NZIEr economist

The New Zealand economy continues to grow, but the growth pace is moderating, the New Zealand of Economic Research said. The nation’s economy is running at a solid pace, generating employment and income growth as well as little inflationary pressures. However, there are two key risks for the economy: a global slowdown and a bursting of the overvalued Auckland housing market bubble. The menace included the potential for weaker global economic growth to weigh down on commodity prices, exports, and the provincial economy. Japan is in recession and Europe is struggling to recover, with even Germany running out of momentum. So far the think tank does not see any catalysts for the Reserve Bank of New Zealand to raise its official interest rates until 2016.

Annual economic growth is expected to average 2.5% over the next five years. Dramatic drops in dairy and log prices, the country’s largest- and third-largest exports, have sapped expectations for economic growth, while the steam may be coming out of the Auckland housing market. However, on a positive side, low interest rates are seen to continue to bolster growth, with low inflation keeping the RBNZ in a wait-and-see mode. GDP growth eased to 0.7% in the second three-month period, following three straight quarters of the 1% expansion.

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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