Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The ECB will be dogmatic about trying to talk down the euro. But unless these words are followed up by action we will not see the euro falling much. The euro has good support around $1.3750, while many will look to sell it at$1.3880 (the high struck earlier this week)."

-Jeremy Stretch, head of currency strategy at CIBC World Markets

European economy is on the mend and the worst is over. These hopes have been boosting the single currency since July 2013, when Draghi pledged to do whatever it takes to save the currency union. Strengthening domestic currency is a sign investors are getting more confident in the economy, however, it can become a massive drag on the bloc’s exporters, making their product less competitive globally. During the last several months, the RBA was constantly repeating the Aussie is at an “uncomfortably” high level and these comments eased some of the pressure on the central bank. Now, with EUR/USD around 1.38 ECB’s officials are trying to do the same thing, by pushing the currency lower only by their comments.

The ECB will hold a policy meeting next week, where policymakers can introduce another portion of fresh stimulus measures, as inflation eased back to 0.7%. This week, Germany’s Bundesbank said the ECB should buy loans and other assets from the region’s banks in attempt to support growth in the region. In other words– introduce the U.S.-style quantitative easing. ECB Governing Council member Erkii Liikanen claimed the central bank is keeping a close eye on the Euro, assessing its impact of the inflation, while European Commission vice-president for industry Antonio Tajani warned that EUR/USD around 1.40 is a threat for the 18-nation’s bloc’s economy.

USD

“We’re fairly convinced the soft patch we’re seeing is temporary. We still have a crummy quarter to get through.”

- Doug Handler, chief U.S. economist at Lexington

Durable goods orders are considered to be a leading indicator, as businesses increase their spending signalling willingness to boost activity in attempt to fill the orders. It is also important to mention that figures are highly volatile and only a huge deviation from the expected value can have a strong market impact. During the last five months, the most traded currency pair was fluctuating in a range from 11 to 23 pips five minutes before and five minutes after the news release. This week the most traded currency pair moved lower to 1.3783 immediately after the data; however, later it soared above 1.38. Thus, how the latest data can be interpreted?

The Census Bureau said orders for long-lasting goods advanced 2.2% last month, marking the strongest reading since November and accelerating from January’s revised reading of a 1.3% contraction. The data surprised markets to the upside, as consensus forecast stood for a 0.8% increase. Core durables, which exclude volatile transportation segment, advanced only 0.2%.

The improvement, however, was mostly led by orders for civilian and defence aircraft. Booking for non-military capital goods stripping out aircraft plunged 1.3% in the period after a 0.8% increase in January. Bad weather has mudded the outlook for the companies by restraining consumer spending and the rebound in the property market.

GBP

“There is now a distinct possibility that real wage growth will hit positive territory in April, helping to support household spending. Today’s news of falling inflation is encouraging for living standards.”

- Samuel Tombs of Capital Economics

Earlier this week the Office For National Statistics said the rate of consumer prices decelerated to 1.7% last month, hitting the lowest since November 2009 and slowing from 1.9% a month earlier. The inflation hovered below the official target of 2% for the second consecutive month, supporting the case the central bank will stick to its pledge to keep borrowing costs at the current level. At the same time, weak inflation can help to eliminate the remaining slack in the economy, as according to analysts’ forecasts there is just 0.9% of spare capacity.

It seems that wages are finally on course to outpace inflation for the first time since the beginning of the global finance crisis. A decline in petrol prices and a significant appreciation of the Sterling helped to keep a lid on consumer prices, narrowing the gap between wages and consumer price inflation. Even though price growth still outpaces wage growth, that advanced 1.1% in the final quarter of 2013, economists believe the overall inflation will continue decelerating as earnings rise. Moreover, weaker inflation eases the pressure on the central bank to begin raising interest rates. According to the Office for Budget Responsibility, real wage growth will pick up this year, even though the forecast for nominal earnings growth was revised to the downside.

AUD

“This outlook is, obviously, a balance between the large negative force of declining mining investment and, working the other way, the likely pick up in some other areas of demand helped by very low interest rates”

- Glens Stevens, RBA governor

Earlier this year Australian policymakers claimed that an exchange rate of the Aussie against the U.S. counterpart around 0.92 is representing a threat to the domestic economy, dampening exporters’ profits. After a shift in the RBA’s mood the Aussie soared back into this dangerous territory, while Glenn Stevens comments provided an additional boost to the currency.

During a speech in Hong Kong RBA’s Governor highlighted positive developments in the economy, saying the transition phase from mining-led demand is moving to its end. Stevens cited domestic consumption as the key driver of the economy. Analysts believe the central bank will keep the interest rate unchanged during the year in order to avoid a growth gap that is emerging amid decreasing number of mining projects. This suggestion was supported by Stevens, who pledged to keep borrowing costs at a record-low 2.5% for a period of time to encourage household spending and residential construction. On the back of his comments the Aussie gained additional 0.33% versus the greenback and 0.41% against the single currency. Regarding the housing market Stevens warned that both borrowers and lenders should not be complacent about the risks of investing in the nation’s property market. While Australian financial stability remains sound, heating housing market will not be on the RBA’s radar.

NZD

"Our standard statistical return for the banking system has served us well over the past 15 years but we’re now re-developing it. That reflects changes in the banking sector over the period and a better understanding of what to monitor in the sector.”

-Graeme Wheeler, RBNZ Governor

Another success story from the RBNZ. While central bank’s hawkish view and rate hikes can slow down economic growth, all decisions made by Graeme Wheeler’s team proved to be successful so far.

New Zealand currency received another strong bullish bias from the central bank’s actions on Wednesday, as the RBNZ revealed the success of its restrictions on mortgage lending. The NZD/USD pair inched higher to 0.8599, approaching a strong resistance at 0.8605, while a move above it will clear the way for a recent high at 0.8636. In October 2013 the central bank imposed a mortgage-lending criteria for domestic banks that were supposed to restrict borrowers with less than 20% equity in receiving a mortgage. The restriction was introduced as a measure to cool down house-price inflation, which had soared above 20% in the nation’s most populated city– Auckland, as low borrowing costs attracted many investors into the housing market. Even despite the success of new limitations, the Reserve Bank of New Zealand began raising interest rates, becoming the first developed country to start tightening its monetary policy, in attempt to slow the overall inflation, which was heading to the mid-point of central bank’s 1-3% target band. New Zealand offers a relatively high rate of return, attracting more investors and pushing the currency well above historical levels.