Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Given that inflation is well below target in the euro zone, deflation does, indeed, look to be a bigger risk in 2014 than inflation. Yet painful deflation is unlikely because of “a broad pick-up of growth this year.”

- Nick Kounis, head of macro research at ABN Amro Bank NV

The shared currency has lost some ground versus its major peers on Tuesday following a report from the Eurostat, showing inflationary pressure retreated further away from the ECB official target in December, raising concerns the region is still struggling to grow. The report attracted considerable attention of market participants, since Mario Draghi surprised everyone by cutting interest rates in November due to an excessive fall in inflation.

Tuesday’s report showed the annual inflation rate dipped to 0.8% in December, easing back from 0.9% a month earlier. The rate has been fluctuating below the central bank’s target for 11 months, and has even hit a four-year low of 0.7% in October. The core rate also plunged to 0.7% over the same period, from a 0.9% reading a month earlier. At the same time, data showed producer prices declined 0.1% in November, after a 0.2% gain a month earlier. Analysts, however, expected a reading of 0.1%. December’s gauge in couple with weak lending in the Eurozone could be interpreted as an alarming sign for the ECB, and heating up debates whether Draghi will have to pull the trigger on Thursday. In case inflation continue falling down, the likelihood of another intervention and the announcement of negative interest rates seem to be more pronounced than couple of months ago. Despite some strength of the most traded currency pair this week, the pair is likely to find resistance around 1.3652.

USD

"The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for US economic growth in coming quarters”

- Ben Bernanke, Fed Chairman

The U.S. Senate has confirmed Janet Yellen as the next Chairman of American central bank, with 56 senators voting in favour of her appointment. While some analysts are already warning her about the difficult road ahead once Ben Bernanke steps down after eight years ruling the Fed, the domestic economy may decrease pressure on the first woman, who will lead the Federal Reserve.

On Tuesday the Commerce Department unveiled the November trade balance data, saying the gap between exports and imports narrowed to the lowest level since October 2009. The gap shrank 12.9% to $34.3 billion, from a revised figure of $39.3 billion a month earlier, surprising markets on the upside. In the meantime, the current account gap narrowed to $94.8 billion, hitting the smallest reading since the third quarter of 2009 and posting a significant improvement from the previous quarter’s shortfall of $96.6 billion. This is equal to 2.2% of the U.S. GDP– the smallest share since the beginning of 1998. Exports soared 0.9% to $194.9 billion, climbing to a record level, while imports sank 1.4%. The world’s largest economy expanded by 4.1% in the third quarter, while estimates for the final quarter have been revised up on the back of stronger consumer spending and manufacturing. All these figures are pointing at strengthening of the U.S. economy, hence, there is a ground for more hawkish comments from the Fed, and, therefore, the buck can appreciate in the nearest future.

GBP

“It is a fantastic to start the New Year with a very positive quarterly survey. Confidence is high and our members are resolute in their determination to take the recovery from being good to being truly great.”

- John Longworth, Director General of the BCC

A housing bubble? Imbalanced economic recovery? These were only the main topics among economists during the last year, as they expressed their concerns about the future prospects of the U.K. economy. The latest quarterly survey conducted by the British Chambers of Commerce showed the economic recovery is set to build up steam this year, as key indicators of economic health are higher than before the financial crisis in 2007. Better-than-expected data from the final quarter of 2013 are likely to pass through to the new year and should improve further in the short-term. During the last three months of 2013 the economy could accelerate to 0.9% from a 0.8% growth seen in the third quarter, the BCC said. While this level matched predictions made by the BoE, the ONS will unveil the data only on January 28.

According to the BCC, the central bank should keep its ultra-loose monetary policy for as long as it is need to prevent any setbacks. Mark Carney should not consider starting increasing rates before the planned time and should continue with his forward guidance and remain steadfast in plans to keep inflationary pressure around the threshold level of 2%. Economic strengthening has boosted the cable above 1.66, and while the pair is trading at 1.6422, a move back to the previous highs can be anticipated, taking into account more positive data from the U.K.

CHF

"In my opinion the euro-swiss cap at 1.20 is useless already today and SNB will leave as a future backstop”

- Attilio Bertini, head of research at Credito Valtellinese

During December the EUR/CHF currency couple was highly volatile, first depreciating from 1.2325 to 1.2166 and then rocketing above previous highs. Therefore, the possibility SNB’s foreign currency reserves will change over the last month of 2013 a lot was low. The Zurich-based central bank’s holdings stood at 435.19 billion francs in December, down from a revised of 435.85 billion francs a month earlier. Analysts, expected a slightly steeper decline to 435 billion francs. The data came as the bank has lost around 15 billion francs on its gold holdings, as the bullion posted its worst yearly decline in more than a decade. Nonetheless, some of the SNB’s holdings have compensated the loss.

The Francs is still popular among investors as they consider it as a haven at times of heightened market stress. However, amid improvement in the Eurozone, the pressure on the Franc eased, and the SNB has not intervened the financial markets since September 2012. After hitting an all-time high of 444 billion francs in May, reserves has stabilised around the current level.

The SNB expects a 9 billion loss for the last year, a because of this loss the central bank will not have to pay its customary payment to the Swiss government. In November, a poll conducted by Bloomberg showed that 64% of economists expect the Swiss National Bank to remove the cap after the first quarter of 2015.

AUD

"Australia's annual exports to China totalled over $92 billion, so it will be truly staggering just how much income will be generated from our largest trading partner when all the major resource projects are operating at full capacity”

- Craig James, CommSec chief economist

The Australian Dollar started this year by performing a strong rally against its U.S. counterpart, however, after hitting a crucial level of 0.90 the pair pulled back and extended its decline on Tuesday, following a report from the Australian Bureau of Statistics. The official data showed the resource-rich economy logged its fifth straight monthly trade deficit, even though it came smaller than expected, as exports improved, while imports turned lower.

November trade deficit stood at $118 million, after a gap of $358 million a month earlier. The figure came below analysts’ forecasts of a $300 million deficit. Shipments advanced by $94 million totalling $27.4 billion, on the back of higher non-rural goods exports, which added almost $93 million, while shipments of metal ores and minerals soared 4%. At the same time, imports sank 1% over the period, led by a 2% drop in the amount of imported consumption goods. Before the report the Westpac bank expressed their view, the data should have come better-then-expected as exporters benefited from weaker Aussie and stronger prices for bulk commodities. The Aussie has lost more than 3% versus the U.S. Dollar in November, pushing exporters earning higher and lifting the cost of imported goods and services.