Fundamental Analysis

EUR

“The eurozone’s manufacturing economy missed a beat at the start of the year. Growth of order books, exports and output all slowed”

- Chris Williamson, chief economist at survey compiler Markit

The Euro zone’s unemployment rate dropped to the lowest level in almost four years in December. According to Eurostat, the number of unemployed declined 49,000 to a total of 16.75 million, pushing the region’s jobless rate to 10.4% from 10.5%, the lowest level since September 2011. The largest drop was registered in Spain, where the unemployment rate plunged from 23.6% to 20.8%, whereas in Finland the jobless rate rose the most, from 9.0% to 9.5%. In Germany, the region’s powerhouse, the unemployment rate declined to 20-year lows at 6.2% in January. The Euro zone’s unemployment reached the peak at 12.1% in March-May 2013, and the rate has been sliding since then. Despite the multi-year low, joblessness remains an acute problem, as it is still well above the 7.5% level seen before the global financial crisis.

A separate report showed prices at factory gates in the Euro bloc fell more than expected in December, underscoring challenges the European Central Bank face to bring inflation to the target. Producer prices declined by 0.8% on month in December after a 0.2% drop in the prior month, compared with a 0.6% decrease expected by economists. Measured on an annual basis, prices at factory gates plunged 3.0% in the reported month. ECB President Mario Draghi promised to increase inflation with a help of monetary policy tools that the central bank still has at its disposal.

JPY

“I am convinced that there is no limit to measures for monetary easing”

- Haruhiko Kuroda, Bank of Japan Governor

Bank of Japan Governor Haruhiko Kuroda said the BoJ has ample room to increase further monetary accommodation and is ready to cut interest rates deeper into negative territory. Even after launching what Kuroda described as "the most powerful monetary policy framework in the history of modern central banking," the Governor is prepared to deploy new tools to support the world’s third biggest economy if existing tools appeared to be ineffective. The BoJ chief said although Japan's economy was recovering moderately, it was taking longer than expected to reach the 2% inflation target due to slumping energy costs. Kuroda added that the recent global markets rout and slowing emerging economies could undermined Japanese business sentiment and discourage firms from increasing wages. However, Kuroda remains optimistic on China’s outlook, saying the world’s second biggest economy was likely to ensure stable growth as policy makers have a lot of opportunities to provide additional fiscal and monetary stimulus measures.

The BoJ stunned global financial markets by following European counterparts, when it introduced negative interest rates on January 29. The central bank will charge a 0.1% interest on some of the excess reserves financial institutions park with the BoJ, while keeping its existing asset-buying programme unchanged

GBP

“UK construction firms struggled for momentum at the start of this year, with heightened economic uncertainty acting as a brake on new orders and contributing to one of the weakest rises in output levels since the summer of 2013”

- Tim Moore, Markit economist

Growth in the UK construction sector unexpectedly slowed in January to the weakest level in nine months following a short-lived recovery in December. The Markit/CIPS UK construction PMI fell to 55.0 from 57.8, against economists’ forecast of 57.5. Housebuilding and commercial property work were the biggest drag on the headline indicator. Furthermore, optimism among construction companies fell to the lowest level since December 2014. Even though employment within the sector was sustained in January, it rose at the weakest pace for more than two years. Construction remains one of the most volatile components on the output side of the UK’s gross domestic product. It was again among the downward drivers in the final quarter of 2015, when it dropped 0.1% from the third quarter. Overall Britain’s economy grew 0.5% in the December quarter, up from the downwardly revised 0.4% in the preceding trimester. Services remained the biggest driver of the economy, accounting for 78% of GDP.

Investors’ eyes now turn to the services PMI due Wednesday and “Super Thursday”, when the Bank of England announces its policy stance and publishes the Monetary Policy Committee minutes as well as quarterly Inflation Report forecasts.

NZD

“It would be inappropriate to attempt to offset the low oil price effect through the OCR”

- Graeme Wheeler, RBNZ Governor

The Reserve Bank of New Zealand tried to cool expectations of further cut of the official cash rate in light of low inflation, which currently stays around zero, saying “it would be inappropriate to attempt to offset the low oil price effect through the OCR”. Instead, the central bank takes a longer term approach to inflation targeting. However, the RBNZ Governor Graeme Wheeler admitted that should concerns deepen around the global economy growth prospects and its effect on New Zealand, further policy easing may be needed over the coming year. Wheeler slashed the key interest rate four times last year to all-time low 2.5%. Nevertheless, inflation eased to 0.1% in the December quarter of 2015 as oil prices plunged. Wheeler, however, reiterated that it would take longer for consumer prices to return to the central bank’s 1%-3% target range than previously estimated.

Meanwhile, a recent report showed that a decline in participation rate and a steep fall in the number of people unemployed in the fourth quarter brought the nation’s jobless rate to the lowest level in more than six years, whereas economists had predicted a slight increase in the unemployment rate. The gauge dropped 0.7 percentage points to 5.3% in the reported period, the lowest since the March quarter 2009. Participation rate slid 0.3 percentage points to 68.4%, while 16,000 fewer people became unemployed.

AUD

“While stronger volumes growth contributed to an improvement in export values in the second half of the year, ongoing price pressures continue to weigh heavily on exporter revenue growth”

- Stephen Walters, chief economist at JPMorgan

Australia’s trade deficit widened in December to an eight-month high, as mining exports declined sharply, suggesting net exports are likely to make a negative contribution to GDP in the fourth quarter. Australia posted a seasonally adjusted trade gap of A$3.54 billion in December, compared with a shortfall of A$2.73 billion in the prior month, according to the Australia Bureau of Statistics. Exports plunged 5% in December, led by falling agricultural and iron-ore shipments, while imports slipped 1%. Australia’s trade accounts have been suffering from falling prices for major exports like iron ore and coal, with a downturn in China’s economy hitting hard.

A separate report showed the number of Australian home building permits rebounded in December. Consents surged 9.2% on month in December, overshooting economists’ expectations twofold. Despite recent signs of loss of momentum in the housing sector, 2015 was a year of robust housing construction, contributing strongly to growth. However, the outlook for 2016 is less optimistic, with residential investment and construction to falter a little following strong few years. Some economists predict the slowdown will eventually bring the RBA off the side-lines with at least two rate cuts by the end of the year. Market participants are now pricing in a 36% probability of an interest rate cut by April, with the bets on a rate cut by July surging to 76%.

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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