Daily Forex Fundamental Overview

Fundamental Analysis

Highlights of the week ended April 24

Canada

BoC Governor Stephen Poloz said the January interest-rate cut helped to put the nation's economy back on track amid rebounding crude prices, and added the biggest risk to the outlook may be outperformance of the US. Poloz became the first G-7 central banker to ease monetary policy in response to the sharp decline in oil prices, slashing the key rate in January to 0.75%. Poloz called it "insurance" against the effect of the downturn. In the aftermath of the surprise decision, bets on another cut this year surged. Though expectations fell as the central bank signalled more confidence in the economy and as prices for oil, a major Canadian export, stabilized and recovered partially, the market was still betting on a 35% chance of a rate cut in July. Poloz, however, said the BoC must consider the possibility that oil could renew its downward trend. The biggest "risk" to the bank's outlook is the possibility the US economy will expand faster than expected, he said, noting that it would be a positive risk as strong US demand would stimulate Canadian economic growth.

Australia

The RBA signalled further interest rates cuts may be required to help rebalance the Australian economy that is struggling to grow. Minutes from the RBA's April board meeting showed the central bank is keeping the door open for a further interest rate cut after surprising markets twice by maintaining the official cash rate steady at 2.25%. The central bank justified its decision to keep rates on hold in April as it wanted to assess more economic data, including inflation trends, before taking further monetary decision. RBA members agreed that the outlook for the economy remained subdued, especially given that the drop in mining investment is yet to bottom out, which would signal that further easing will be required. According to the RBA, one of the keys to underpinning the investment-drained economy is a lower exchange rate, acknowledging in the minutes that further declines in the Australian Dollar are likely, which would help rebalance growth. RBA governor Glenn Stevens reiterated that further rate cuts remained on the table, as the inflation outlook was expected to stay benign.

UK

BoE officials voted unanimously to maintain interest rates unchanged at a record low of 0.5% in April, with very low inflation being the main reason for keeping a steady stance on monetary policy. Yet, while the central bank expected consumer inflation to briefly slide into negative territory in the coming months, it saw a faster rebound of inflation once the effect of cheap oil and food drops out of CPI calculations towards the end of this year, and the effect of the Pound's appreciation dissipates faster than expected. The central bank added that the UK domestic data had been broadly in line with its February forecasts, while the Euro zone appeared to be recovering more strongly than thought. Governor Mark Carney and other policymakers have said they expect the next move by the Bank to be a rate hike.

EUR

“Germany is on a solid path of growth, driven by favorable developments on the labor market, rising wages and increased employment. The main pillar of recovery is consumer spending.”

-Sigmar Gabriel, German Economy Minister

German business morale improved further in the current month, as business confidence surged to the highest level in 10 months, a sign the Euro zone’s number one economy is set to pick up steam on the back of massive stimulus and a favourable exchange rate. The Ifo institute’s business climate index climbed for a sixth consecutive month to 108.6 from 107.9 in March. Analysts had forecast 108.4 points in the reported period. Ifo’s measure of current conditions increased to 113.9 in April from 112.1 in the previous month, while a gauge of expectations slipped to 103.5 from 103.9. Germany's Bundesbank remains upbeat about the country's growth prospects in 2015 and 2016 as it has recently raised its outlook, saying the economy will expand 1.8% in both years after previous estimates of 1.5% for 2015, and 1.6% for 2016. Similarly, the International Monetary Fund also expects The German economy to regain a stronger footing as it has revised its growth projections for the country to 1.6% this year and 1.7% in 2016.

Meanwhile, in Latvia’s capital Greek Finance Minister Yanis Varoufakis faced sharp criticism from his Euro zone colleagues last week for failing to so far provide an updated list of reforms in order to receive financial aid, according to Jeroen Dijsselbloem, the chairman of the Euro zone finance ministers.

USD

“The good news is we're growing, we're creating jobs, property values are rising. The bad news is we're not growing quickly enough and there's tremendous income disparity”

-Hank Paulson, the former U.S. Treasury Secretary under President George W. Bush

US durable goods, a bellwether of business spending, soared considerably more than expected in March. Orders for durable manufacturing goods surged 4% in March, the biggest increase since July 2014, compared with a 0.6% rise expected by economists and following an upwardly revised reading of minus 1.1%, the Commerce Department reported. The jump was driven by a big rise in demand for commercial aircraft, with orders for civilian aircrafts spiking 30.6% after a 2.2% drop in February. Orders for motor vehicles rose 5.4%, and the overall transportation category expanded 13.5%, the biggest gain in eight months. However, outside of the transportation category, orders were down for a sixth straight month. Excluding transportation, core orders to US factories for long-lasting manufactured goods fell 0.2%. Shipments of non-military capital goods, which will impact the first quarter GDP estimates, declined 0.4% in March after falling 0.1% in February. Economists believe that overall economic growth slowed to between 1% and 1.5% in the January-March quarter. Yet, a rebound to growth of around 3% for the rest of this year is expected.

Manufacturers are struggling with the effects of a dramatic increase in the value of the US Dollar, which undermines exports by making US-produced goods more expensive overseas. A stronger Dollar also makes imports cheaper and more competitive in the US.

CHF

“The Swiss franc is significantly overvalued overall. A correction of this overvaluation is to be expected over time.”

- Thomas Jordan, SNB President

The Swiss National Bank stands ready to intervene in currency market, the central bank’s President Thomas Jordan said. Swiss policy makers have pledged repeatedly to intervene in the FX market in recent months, after abandoning a cap of 1.20 per Euro on the Swiss Franc in the beginning of the year. The cap exit caused the Franc to appreciate sharply and the Alpine economy now faces a year of falling consumer prices and sluggish growth. To offset the loss of the minimum exchange rate and discourage investors from holding Francs, the SNB decided to lower its deposit rate to minus 75 basis points. However, Jordan highlighted that the negative interest rates will not become the “new normal”. The SNB foresees an inflation rate to remain in the negative territory, hovering around minus 1.1% for 2015. It also expects growth of “just under” 1% for this year. Yet, SNB President said the Swiss economy will probably successfully overcome its current challenges.

Last week, the central bank said it would eliminate exemptions from its policy of negative interest rates for certain public accounts, including the SNB's pension fund. The move confirms that the SNB's policy of negative interest rates has not been as effective at driving capital away from the Franc as the central bank had hoped.

CAD

“Starting in the second quarter we think the positives will be more important than the negatives and certainly in the second half of the year the shock should be fully behind us”

- Stephen Poloz, Bank of Canada Governor

Stephen Poloz, Bank of Canada Governor, admitted that the negative impact of the precipitous decline of oil prices on the Canadian economy will be short-lived and disappear in the second half of this year. The impact of falling oil prices hit the economy hard in the first quarter of the year, eroding national income by 3%. However, the emphasis will shift from lower oil prices to “positives” including more robust US demand for Canadian goods in the next few months. Poloz said the world’s number one economy, which consumes about three quarters of Canadian exports, has “great fundamentals,” and he had expected it would perform better than most analysts anticipated.

Earlier in the week he said there are signs the central bank’s unexpected January interest rate cut and stronger US demand will help Canada’s economy return to normal by the end of next year. Poloz said the January rate cut appears to have helped to put the nation's economy back. Poloz became the first Group of Seven central banker to ease monetary policy in response to the sharp decline in oil prices, slashing the key rate in January to 0.75%. Poloz called it "insurance" against the effect of the downturn. In a statement last week, Poloz suggested the worst of the oil shock may be over.