Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Neither the VW emissions scandal, nor the refugee crisis, nor the attacks in Paris are scratching the mood of German companies”

- Andreas Scheuerle, DekaBank economist

German business morale improved in November, reaching the highest level since summer 2014. Ifo’s business climate index rose to 109.0 from 108.2 in October, the strongest reading since June 2014. The current assessment sub-index, which measures the current conditions in the Euro zone’s number one economy, climbed to 113.4 points, compared with the previous month’s figure of 112.7 and beating market estimates of 112.4 points. The Ifo expectations index, showing firms’ projections for the next six months, increased to 104.7, up from 103.9 in October.

The unexpectedly strong business climate reading by the Ifo economic institute came after the data showed the German economy slowed in the third quarter, as robust domestic consumption was offset by sluggish exports and slack corporate investment. Germany’s third quarter GDP growth eased to 0.3% from 0.4% in the June quarter, according to the Federal Statistics Office. This translated into an annualized growth rate of 1.3%, the weakest rate since the third quarter last year. Private consumption rose 0.6% from the second quarter, while government consumption increased 1.3%. At the same time, exports climbed a modest 0.2%, whereas imports jumped 1.1%.

USD

“You’re getting more growth in the third quarter and perhaps that could come at the expense of less growth in the next couple of quarters”

- Jim O’Sullivan, chief U.S. economist at High Frequency Economics

The world’s number one economy grew faster in the third quarter than originally estimated. Gross domestic product rose at a 2.1% annualized rate, compared with the initial reading of 1.5%, according to the Commerce Department. The consumer spending was the biggest contributor to growth as cheap gasoline and greater job security gave more confidence to spend. Household consumption, which makes up almost 70% of the economy, grew at a 3% annualized rate, slightly less than the previously estimated 3.2%. The final release of GDP data for the third quarter is scheduled for late December. Steady growth in the world’s largest economy helps to create jobs and push down the unemployment rate, which Fed policy makers are watching as a gauge of how much slack is left in the labour market. Fed officials are considering hiking the benchmark interest rate as soon as next month, if data continue to indicate that the US economy can weather tighter monetary policy.

Nevertheless, consumer confidence in the US economy weakened sharply in November as Americans became more concerned about the job market. According to the Conference Board, the index of consumer confidence plunged to 90.4 from a revised 99.1 last month, marking the second consecutive monthly drop and the lowest reading since September 2014.

GBP

“The question in my mind is when is the appropriate time for interest rates to increase in this economy”

- Mark Carney, BoE Governor

Testifying before a treasury select committee, Bank of England Governor Mark Carney reiterated that the current, record-low interest rates in Britain are likely to continue “for some time”, explicitly signalling that the central bank is in no hurry to raise rates. UK interest rates have remained at 0.5% since March 2009. Given the current weak pace of growth and persistently low inflation, most economists do not expect the BoE to hike rates until at least the second quarter of 2016. British consumer prices dropped by 0.1% in October, and are expected to stay close to zero for a few more months.

Following the dovish comments from Carney, BoE chief economist Andrew Haldane said the UK economy and inflation outlook are skewed downward amid external headwinds. Haldane said that the central bank should be even ready to slash interest rates if needed and a “third phase” of the global financial crisis, stemming from emerging markets, could have a prolonged impact on the global growth. Supporting this view, Kristin Forbes, a member of the rate-setting Monetary Policy Committee, said if there is any unexpected shock, she could consider further loosening of the policy.

AUD

“Building (residential and commercial) hasn’t yet taken over from engineering in terms of total work, but it’s not far away”

- Craig James, CommSec chief economist

Construction activity in Australia dropped at the fastest pace in almost four years last quarter after increasing for the first time in more than a year in the second quarter. The total value of construction activity, including building and engineering work, plunged by 3.6% to $49.04 billion in the three months through September, compared with economists’ projections of a 2% decline. The main driver for the negative result was the precipitous drop in engineering work, including mines, roads and bridges, which plummeted 7.3% in the reported period. Measured on an annual basis, the amount of construction work done was down 3.7%. Over the past year engineering work plunged 11.7%, as mining investment wanes. The data signalled that there was still plenty of momentum in housing construction, yet the sharp decline in engineering work meant construction was a drag on the Australian economy growth last quarter.

The Reserve Bank of Australia might add further stimulus by slashing interest rates again if the nation’s economy starts deteriorating. However, recent strength in business conditions and robust employment growth suggest that the central bank may remain in a wait-and-see mode for some time.

JPY

“A few members added that the projected delay in the timing of reaching 2 percent had also been partly attributable to a somewhat slow improvement in the output gap”

- Bank of Japan

Minutes of the latest Bank of Japan meeting showed that officials reiterated the view that the world’s third biggest economy continued to recover moderately, despite exports and production remaining more or less flat due to the effects of the slowdown in emerging markets. On the domestic side, the central bank saw private consumption staying resilient and labour market conditions continuing to improve steadily. With regards to inflation, some members of the BoJ’s policy board assumed that an output gap was one reason Japan’s economy was taking longer to meet inflation targets, highlighting a lingering worry that the delay in reaching the 2% inflation target meant that QE had been ineffective. At the meeting on October 30, the BoJ pushed back the timing of hitting its 2% goal by six months to the second half of fiscal 2016 due to weak oil prices.

Policy makers predicted that domestic demand was likely to follow an uptrend and exports were likely to start increasing moderately on the back of recovery in emerging economies. Thus, the Japanese economy was seen growing at a pace above its potential from fiscal 2015 through fiscal 2016.

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