Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“There has been some volatility in German inflation readings in May and June but our economists argue that the underlying picture has remained relatively stable”

- BNP Paribas

On the back of stronger than expected growth in the world’s largest economy, the most traded currency pair dipped below 1.34–mark. While figures can look unrealistic, unconvincing data from Europe also supports the case for the pair’s depreciation. Inflation has been the key concern for the ECB in the recent months and it seems that even despite a massive stimulus package, little has changed. On Wednesday Destatis reported the cost of living in Europe’s largest economy rose 0.3% on a monthly basis in July, while annual growth stood at 0.8%, easing back from June’s 1.0% and meeting the consensus forecast.

That was not the only report from the 18-nation bloc continues on Wednesday, as consumer morale dipped to a three-month low in July, while growth in Europe’s fourth largest economy, Spain, accelerated more than originally was expected. A report from the European Commission showed a gauge of consumer confidence reached –8.4 in July, falling 0.9 points, meeting flash estimates published a week earlier. Despite disappointing figure, the index is still above the long-term average of –12.6 points. In the meantime, Spain is sending optimistic signs, as growth of 0.6% outstripped central bank’s forecasts, putting annual growth at 1.2%. This makes Spain one of the fastest growing European economies. Inflation, however, is still sluggish, with consumer prices falling 0.9%, the lowest rate for the last five years.

USD

“Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources."

- Janet Yellen, Fed chairwoman

The world’s largest economy was expected to bungee jump in the second quarter, recovering from a 2.9% slump in first three months of 2014. The U.S. economy expanded at an annualized rate of 4.0% between April and June, beating the consensus forecast of a 3.0% growth, while first quarter’s growth has been revised to –2.1%, instead of –2.9% expected earlier. Another positive aspect was a 2.3% surge in personal consumption expenditures, meaning consumers are willing to spend despite economic uncertainty.

Also Wednesday, in a widely anticipated move, the FOMC decided to reduce the central bank’s bond-buying programme by another $10 billion to $25 billion per month starting August. Currently purchases will be split between long-term treasuries and mortgage-backed securities by $15 and $10 billion respectively. During the last meeting the FOMC expressed its concerns about the stability of the labour market, this time, the Chair has turned beat on the domestic labour market, as the economy is moving towards its full-employment goal. It means that the Fed sees a range of indicators including the participation rate improving. It is another signal that the committee is wary of raising borrowing costs too early, however, with forecasts the unemployment rate falls below 6% this year, higher inflation and stronger growth, the FOMC can change its view and consider a sooner-than-expected rate hike.

GBP

“When the pound was at the 1.60 level against the dollar we were managing okay. Now it is above $1.70 we are seeing real issues and we are beginning to lose out to competitors.”

- Ken Winn, operations manager

The Pound has been the top performer over the last 250 trading days, with the corresponding index rocketing 10.22%, the most from other major currencies. The Cable has been on a rise since July 2013 when the economy avoided falling into a triple-dip recession and Mark Carney took over the Bank of England. In contrast to the Kiwi, nobody is saying the strength of the currency is not supported by macroeconomic data. Moreover, the U.K. is now the fastest growing among other G7 economies. However, is the Pound really overvalued or the strength is justified?

According to the International Monetary Fund, the currency is overvalued by 5-10%. However, the Chancellor George Osborne, who was criticised by the IMF for “playing with fire”, will not agree to this statement. One of the possible ways of assessing the strength of the currency is the Economist’s Big Mac Index. According to the index, a Big Mac in Britain costs 2.89 pounds, compared to 2.81 and 2.91 in the U.S. and the Eurozone, respectively. The figures mean that the Sterling is 2.6% overvalued versus the Buck and by only 0.6% against the single currency. According to that, the appropriate levels of GBP/USD and EUR/GBP are 1.66 and 1.27, respectively. Keeping this in mind, what is the better barometer to measure the strength of a currency– the IMF or the more digestible Burgernomics?

JPY

“Weak domestic demand, sluggish exports, and inventory adjustment pressures will likely weigh on manufacturing activity over the coming months”

- HSBC

A disaster, this is the only way how a report from the Ministry of Economy, Trade and Industry can be called. The industrial output, which is crucial for the world’s third largest economy, posted its sharpest fall in over three years, highlighting the widening impact of April’s tax hike. While impact on the USD/JPY currency pair was muted, mostly due to the strong resistance at 102.16, the data can have its footprint on the BoJ stance.

The overall drop for the April-June quarter was the first in six quarters in a row, with a 3.7% decline being the largest since the second quarter of 2011 that was provoked by earthquakes and tsunami. Shipments sank 1.9% in June, while inventories increased by as much, meaning Japanese companies were stockpiling. The manufacturing sector has cut back in response to weaker consumer spending as well as a failure of exports to improve even despite an 18% depreciation of the domestic currency over the last year. The recent ugly data points to a sharp downturn over the quarter, meaning it could wipe out much of the Japan’s 6.7% growth in the first three months. The next GDP report is scheduled for August 13. While a second-quarter setback for economic output is widely expected, a massive contraction will be a blow to Shinzo Abe and his Abenomics, intensifying uncertainty surrounding future fiscal and monetary plans.

NZD

“Of course, a downgrade was widely anticipated, given the negative combination of tumbling auction prices and a still-elevated NZD”

- ASB Chief Economist Nick Tuffley

Following more than a half-month long period of depreciation the NZD/USD is finally bottoming out. While U.S. statistics can drag the pair significantly lower, the panic surrounding last RBNZ meeting begin to wane. The Kiwi edged higher 0.11% trading at 0.8511 at the moment of writing, rebounding from this month’s low at 0.8493.

Amid strong technical level at 0.85 the Kiwi also found support in domestic data. A report form Statistics New Zealand showed building consents jumped in June following a sharp drop in May, suggesting developers are making the most of low borrowing costs while they last. The country consented a total of 1,950 new dwellings over the observed period rising 3.5% on a monthly basis, however, still failing to offset May’s 4.4% revised drop. At the same time, residential construction work rocketed 27% from a year ago, totalling $772 million. Nevertheless, higher interest rates and restrictions on low equity borrowers have led to a moderation of the domestic housing market, with house-price inflation registering steady declines.

Another worrying sign for the New Zealand economy came from the world’s largest dairy company Fonterra, which reduced its forecast dairy payout for the next season. Dairy is a key priority for New Zealand farmers, and account for majority of overall exports, meaning the economy can lose one of its drivers.