Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“It is very important that we do not create a second-class membership of the ECB under the new system"

- Fine Gael MEP Brian Hayes

As Lithuania is heading towards the Euro zone membership as soon as 2015, it backs up the fact that the Euro is a strong reserve currency. However, the country’s succession to the currency bloc will bring dramatic changes to the voting system in the European Central Bank’s rate-setting committee. The five biggest countries will share four votes, while the 13 other countries will have to share 11, with Ireland losing its permanent vote at the ECB council level, fuelling indignation of country’s top officials. It means that for one month every year Ireland will not have an opportunity to vote on issues that could have a significant effect on the economy, but would still be able to participate in all discussions.

Meanwhile, the Italian Prime Minister Matteo Renzi is still confident over the country’s economic health, while defending the government’s attempts to implement structural reforms. He also expressed confidence in dragging Italy out of the crisis, keeping Italian finances under control. In contrast, analysts are concerned that the Italian budget deficit could cross 3% of GDP, a limit set by the EU, for this year due to weak economic growth. Last week, Italy's economic data disappointed markets, as the country’s GDP eased 0.2% in the second quarter. Economists hope that the worse-than-expected data would urge Renzi to speed up economic reforms.

USD

“The global recovery has been disappointing"

- Stanley Fischer, Fed Vice Chair

Federal Reserve Vice Chairman Stanley Fischer said on Monday that disappointing recovery of the global economy may have a adverse impact on the U.S economic performance, which in the long-run may grow at a moderate pace of just 2%. Despite some improvements, the overall picture remains sluggish, he said and pointed to some deeper problems in the global recovery. Fischer said that a slowing productivity, falling labour force participation rate and other factors may have undermined the U.S. ability to generate sustainable economic growth. The falling participation rate in the U.S. labour market partly reflects aging population trend. It remains uncertain, though, whether lower productivity growth and lower labour force participation rates are now permanent features of the U.S. economy, complicating projections of growth, inflation, and the amount of slack in labour and product markets. The recent global financial crisis and recession has been forcing central bankers around the world to change their perception of inflation, employment and growth in general.

He also mentioned a number of factors that have contributed to a weak growth including U.S. housing market, lukewarm performance of European economies including Germany and France, but also hard lending in China and a similar stepdown in Latin America.

GBP

“Food experienced its deepest three-month average decline since at least December 2008, explained partly by the continuing keen price competition between supermarkets, which consumers are taking full advantage of, and record low food inflation"

- Helen Dickinson, Director General at British Retail Consortium

Retail sales in the U.K. rose less than expected in July as heavy discounting in the food sector and ongoing low food inflation caused less spending by consumers on food, according to the British Retail Consortium report. Like-for-like sales dropped 0.3% year-on-year and were down as much as 0.2% compared to the previous three-month period. Economists, however, had projected sales to rebound 0.55% following the 0.8% drop recorded June. Food sales was the main driver behind the decrease, with non food sales advancing by 2.4% in the three months to July, while a 3.5% slump during the period in food categories was enough to drag the index into the negative territory. Total sales rose 1.3% on an annual basis, indicating consumers are still willing to spend, albeit at a slower pace than the 12-month average growth rate of 2.3%. Online sales grew robustly, with non-food sales increasing 14.9% from the previous year.

Meanwhile, international bodies continue to paint an optimistic growth picture for Britain’s economy. Recently the OECD joined the club of those, who have praised the country’s economic performance, saying that its index of leading indicators continues to point that growth momentum remains above-trend rates.

CHF

“Swiss franc and yen have definitely outperformed this week"

- Lennon Sweeting, dealer at USForex Inc.

Retail sales in the Alpine country rose considerably more than expected in June following a dip in the previous month, fuelling optimism over the Swiss economy health. Swiss retail sales jumped 3.4% year-on-year, according to the Federal Statistics Office. The May’s figure was revised to a 0.5% decline from a previously recorded decrease of 0.6%. Retail sales of food, drinks and tobacco reported an increase in real turnover of 2.5%, whereas the non-food sector registered positive growth of 3.6%, the office said. Following the data release, the Swiss Franc retreated slightly versus the U.S. Dollar, with USD/CHF rising 0.08% to trade at 0.9060.

The Swiss Franc, considered to be a safe-haven currency, is supported by investors seek for the relative safety amid the geopolitical tensions in the Middle East. In times of geopolitical stress, the Swiss Franc along with Japanese Yen are the favoured currencies because of their deep liquidity. Nevertheless, investors’ interest also put a drag on the country’s companies including Nestle, the world’s biggest food company, which has recently reported profit fall by 9.5% in the first half of the year, as the strong Swiss currency hurt earnings. The SNB is determined to keep its Franc cap for a prolonged period to support nation’s producers and exporters as well as to ensure price stability for the foreseeable future.

NZD

“On the currency front, we do hold some very strong views that the New Zealand dollar is overvalued…”

- Stephen Toplis, economist at Bank of New Zealand

After reaching a level of 88.35 U.S. cents on July 10, the New Zealand Dollar has been falling since then on a number of reasons including a mounting pressure from commodity prices, which declined for a fifth consecutive month in July, and increased demand for the U.S. Dollar, as a risk-off sentiment prevails in the market amid geopolitical tensions between Russia and the west as well as in the Middle East. Meanwhile, the Reserve Bank of New Zealand hinted at a period of interest rate’s stability, after lifting its OCR to 3.5% in July. The central bank has faced some pressure from the Council of Trade Unions, which urged the RBNZ to halt raising cash rate, to stop the nations’ currency appreciation.

Obviously, heating debate in the U.S. and U.K. over a potential benchmark interest rate hike sooner than expected is also going to be a major driver on the Kiwi over the coming months, with investors interest turning to the Greenback and Pound. On top of that, recently Prime Minister John Key said that he believes the Kiwi is currently overvalued, echoing the statement issued by the central banks at the end of July, which says that the present level of the currency is unjustified and unsustainable, given the exchange rate has yet to adjust to falling commodity prices, and there is potential for a significant decline. Thus, the recent correction that we have been observing over the past weeks is just the beginning.