Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“I don't think ECB monetary policy has the instruments to fight deflation, to be quite frank"

- Wolfgang Schaueble, German Finance Minister

A slew of discouraging data on manufacturing activity in European countries came out yesterday, fuelling concerns over fragile economic health in the region. Manufacturing activity in Germany expanded in August at a slightly slower rate than in the previous month, with the corresponding index edging down to 51.4 compared with July’s figure of 52.4. Meanwhile, activity in Italy’s and France’s manufacturing sector worsened, continuing its downward slide and dampening optimism over the economic outlook. The Manufacturing PMI in France came out at 46.9, down from 47.8 seen in July, while in Italy the index fell to 49.8, reaching the lowest level since July last year. In contrast, positive news came out from Greece, which saw its second-quarter growth fell 0.3% compared with the 4% contraction in the same period in 2013 and following the 1.1% slowdown in the beginning of 2014. Elstat also said that exports soared 5.3% in the second quarter of this year, while imports jumped 4.6% in the same period compared to a year ago. However, Greece's hopes of a possible exit from its deepest recession in a half-century may be seriously undermined by the ongoing geopolitical conflict in Ukraine. These are one of the last pieces of data the ECB policy makers receive before the Thursday’s meeting, which will shed some light on future monetary policy direction. German Finance Minister poured some cold water saying that the ECB does not have the tools to fight deflation, as the Eurozone has run out of instruments.

JPY

“With base pay expanding clearly less rapidly than bonuses, wage growth will likely slow again in coming months, but it should stay in positive territory"

- Marcel Theliant, Capital Economics

Wages in Japan increased at their fastest pace since 1997, helping consumers cope with rising living costs as Prime Minister Shinzo Abe attempts to revive growth in the world’s third biggest economy. Average monthly earnings soared as much as 2.6% from the previous year following the 1% gain in June on the back of a rise in the manufacturing and construction sectors, according to the labour ministry. However, adjusted to inflation, pay shrank 1.4%, marking the 13th month of drops in a row. The figure is a positive sign for Prime Minister Shinzo Abe following a slew of recent weak production and consumption figures. Japanese manufacturing activity expanded in August at a slightly slower pace than initially estimated. The final Markit/JMMA Manufacturing PMI came at a seasonally adjusted 52.2 compared with the preliminary reading of 52.4 and a final 50.5 in July. Economists have blamed an April sales tax hike for cooling consumer sentiment as wage growth has thus far not kept up with price rises.

Separately, a data earlier this week showed Japanese companies lowered capital spending in the second quarter, indicating the first sales tax hike in 17 years curtailed demand. The quarterly 1.8% decline in capex suggests revised data will likely confirm the Japanese economy’s deepest contraction since March 2011.

GBP

“In early 2014, investment and exports offered solid support to GDP growth and reduced the economy’s reliance on consumer spending and the housing sector. But there is now concern that the UK is in danger of repeating the problems of the past”

- Martin Beck, senior economic adviser to the EY Item Club

Activity in Britain’s manufacturing sector rose at the slowest pace in 14 months in August as geopolitical crisis in Ukraine curtailed demand from abroad, reawakening concerns about the balance of economic recovery in the country. The Markit/CIPC UK Manufacturing PMI declined to 52.5 compared to July’s downwardly revised figure of 54.8. However, the sector continues to grow as the index stayed above the 50-point threshold, which separates contraction from expansion. According to Markit, slowdown appeared to be broad based with new jobs, export orders and new business weakening. The new orders component dropped to its lowest level since April 2013 at 52.9, down from 56.8 in July in its biggest one-month slump for two years. Factories also hired staff at the slowest pace since June 2013. Nevertheless, the pace of expansion in British manufacturing remained above its long-term average. A separate report from the Bank of England revealed a sharp increase in consumer credit by 1.1 billion pounds in July. Taken together, the data underlined the U.K.’s reliance on big-spending consumers to fuel its economic recovery.

Meanwhile, a survey of almost 300 companies by the EEF manufacturers' organisation showed a continued positive picture with ongoing plans to invest in machinery and recruit skilled employees.

CNY

“The economy is healthier than it was in early 2014, but the recovery is tepid and patchy, with housing weakness a weighty anchor on both activity and confidence"

- Huw McKay, a senior international economist at Westpac

Growth in Chinese manufacturing activity slowed in August, losing steam for the first time in six months after reaching the highest level in over two years. The slowdown was driven by falling foreign and domestic demand, provoking speculation that further monetary policy easing will be required to ensure that the world second largest economy will not stumble once more. HSBC’s final August Manufacturing PMI came in at 50.2, only slightly above the 50-point mark, which separates expansion from contraction. The official survey showed declines across output, employment, new orders, delivery time and raw material inventory, while the private version highlighted subdued demand.

China's economic growth accelerated to 7.5% in the three months through June 30 compared to the previous quarter's 7.4%. However, the growth was supported by increasing government spending on building railways and other public works. Economists believe that without further government support, growth is likely to lose momentum. Chinese authorities have since April embarked on a series of measures to support growth, including tax breaks for small enterprises, targeted infrastructure outlays and incentives to encourage lending in rural areas and to small companies. China in March set its annual growth target for this year at about 7.5%, unchanged as last year.

AUD

"Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year”

The Reserve Bank of Australia decided to leave its interest rates on hold at record low to bolster growth and underscored that overly strong currency is undermining the economy’s transition away from mining investment. The OCR target was left at 2.5% for a 13th straight month, widely meeting economists expectations for no change. The RBA has repeatedly said about the likelihood of a period of stable interest rates since February this year amid a tepid improvement in investment outside the resource sector, as well as significant advances in house prices and increasing pipeline of home building. The RBA’s rate decision came hours after the Australian Bureau of Statistics showed the current account deficit widened a seasonally adjusted 76% to $13.742 billion. A separate report showed a rise in home building approvals, which may suggest the economy is shifting away from its reliance on mining. Approvals for new home construction jumped 2.5% in July, beating economists’ expectations of a 1.9% rise.

The central bank is trying to spur domestic growth, including residential construction, to encourage hiring of former mine workers and prevent a growth gap emerging as the resource investment boom fades. That has been hampered by a lack of spending by companies and the strong Aussie Dollar, the best performing G10 currency this year.