Daily Forex Fundamental Overview

Fundamental Analysis

Highlights of the week ended May 1

Canada

Canada's GDP remained unchanged in February, as a decline in oil rigging and drilling was offset by an increase in consumer spending. The Statistics Canada also revised January's monthly GDP to a drop of 0.2% from an originally reported 0.1%, and revised the December print to a rise of 0.4% from an originally reported 0.3%. The BoC predicts the first quarter will see no growth, with the effect of cheap oil prices likely to be front-loaded to the beginning of the year. The second and third quarters are estimated to rebound at 1.8% and 2.8%, respectively.

Japan

The BoJ lowered its growth and inflation forecasts, as a slew of soft data highlighted weakness in the world's third largest economy. Japan's GDP will rise 2.0% in the year to March 2016, while the inflation rate is seen at 0.8%, the BoJ said in its semi-annual report. That compares with a previous estimate of 2.1% and 1.0%, respectively. The BoJ report, which followed the central bank's policy meeting where officials refrained from adding fresh stimulus, appeared to push back a timeline for reaching a 2.0% inflation goal to the first half of fiscal 2016, which starts from April till September next year. With the timing of hitting the target being postponed, BoJ Governor Haruhiko Kuroda risks losing credibility.

Euro zone

After four consecutive months in the red, the Euro bloc's consumer inflation recorded zero growth in April, adding to signs that deflationary fears have been easing. In the previous month cost of living dropped 0.1%. Despite the positive development, the headline inflation has remained in what the ECB calls the 'danger zone', below 1% for 19 consecutive months. Core inflation, which excludes food and energy components, climbed 0.6% in April, compared to the same pace of growth seen in the preceding month. The ECB is unlikely to stop its bond-buying programme earlier than planned, according to economists' expectations. Some believed that the ECB will carry on with its QE scheme till September 2016 and then stop it abruptly without tapering purchases. Others said policy makers would steadily wind the programme down, with the end-date ranging from December 2016 to December 2017.

US

The US economy rose marginally in the first quarter amid a fall in business investment and exports as the Greenback strengthened, as well as oil prices and harsh winter weather. During the first quarter, non-residential fixed investment dropped 3.4%, compared to 4.7% in the last quarter, while real export slid 7.2% in Q1, down from 4.5% increase in the December quarter of 2014. The US GDP climbed an annualized 0.2%, compared with the 2.2% growth in the fourth quarter of 2014, and against economists' expectations for a 1.0% rate expansion.

UK

The UK economy slowed more sharply than expected in the beginning of the year, challenging UK's Prime Minister David Cameron, who heads for re-election campaign next week. GDP grew by 0.3% in the first quarter, the slowest quarterly growth since the end of 2012. The main downside drag came from the UK services sector, which accounts for 78.4% of the nation's economic output. The sector expanded 0.5% compared with the last quarter's increase of 0.9%. In addition to that, production declined for the first time since the fourth quarter of 2012, posting a drop of 0.1%.

USD

“With the exception of employment, the subcomponents look upbeat for manufacturing”

- Bradley J. Holcomb, ISM

Manufacturing activity in the US continued to grow at a tepid pace in April as a recovery in new orders was offset by employment falling to its lowest level in more than five years. According to the Institute for Supply Management, the index of factory activity came in at 51.5 in April, remaining unchanged from the previous month, which had marked the lowest level since May 2013. Economists, however, had expected a 52.0 reading. The employment index slid into red territory for the first time since May 2013, declining to 48.3, the lowest level since September 2009. In March, the employment sub-index was 50.0. The weak factory payrolls data may temper expectations for Friday’s April payrolls report from the Labor Department. Economists estimated total nonfarm payrolls rose 220,000 in April, after an unexpectedly weak increase of just 126,000 new jobs in March. Manufacturing payrolls lost 1,000 jobs in March. A separate report showed, consumer confidence rose in April to the second-highest reading in more than eight years as Americans became more optimistic about their financial prospects. The University of Michigan said that its final index for the month jumped to 95.9 from 93 in March. Americans’ inflationary expectations declined to 2.6% in the next year, down from 3% in the previous month. Over the next five to 10 years, they also expect a 2.6% rate of inflation, compared with 2.8% in the previous month.

GBP

“A slowing global economy and strong sterling-euro exchange rate are hurting the competitiveness of exporters”

- Rob Dobson, a senior economist at Markit

Activity growth in the UK factories unexpectedly slowed in April, as the strong Sterling undermined demand for British goods overseas. The UK manufacturing PMI declined to 51.9, down from 54.0 in the preceding month, intensifying fears about the weakness of economic recovery in the country. New export orders fell for the fifth time in seven months, as the Pound has gained 7% this year versus the Euro, the currency of the UK’s top trading partner. The index of new orders slid to 52.9, the lowest level since September. The UK manufacturing PMI is one of the last economic reports before the May 7 general election, where voter opinion polls show neither main party will gain an outright majority. Besides, the survey of activity will sap hopes that the UK economy will fare better in the second quarter. The nation’s economy expanded just 0.3% in the first quarter, the slowest pace since 2012, as industrial production and construction both contracted.

Total industrial production in the UK fell below market expectations in February, due to a sharp decrease in mining and quarrying, while oil and gas extraction experienced the biggest year-on-year fall in 18 months. However, manufacturing performed steadily, increasing 0.4% between January and February, with rises in seven of the 13 manufacturing sub-sectors.

AUD

“Such a shift implies, by definition, that a formal ratings downgrade over the subsequent two-year period is a one-in-three chance”

- Goldman Sachs

Australia’s factory gate inflation rose at a faster pace than expected in the beginning of the year. Australian producers fetched higher prices for final goods in the first quarter than in the October-December period of 2014, suggesting that the flow-through of the weaker exchange rate on import prices was strong during the reported period. Australia’s Producer Price Index for final demand excluding exports increased 0.5% on a quarterly basis in the three months through March, according to the Australian Bureau of Statistics, coming in better than the expected rise of 0.2% and compared with the previous pace of 0.1%. Prices of imported goods advanced 2.8% in the first quarter, while prices fetched for domestic goods rose modestly by 0.2%, suggesting the weakening of the Australian Dollar in recent months has begun to have an upward effect on prices.

Meanwhile, Australia, one of only 12 countries with a top-notch AAA credit rating, risks a ratings downgrade for the first time since 1989, Goldman Sachs warned, saying the country could be hit with a "negative outlook" within months due to Australia's "poor fiscal performance". Falling commodity prices, declining terms of trade, weak economic growth and political impasse stripped $283 billion out of the budget over forward estimates in the past 30 months, with a further $55 billion deterioration possible in the May budget.

CNY

“The economy is not reacting to the policy easing. I expect to see the economy will continue to weaken over the next few quarters despite more easing measures.”

- Kevin Lai, an economist at Daiwa Capital Markets

China’s manufacturing and services sectors expanded modestly last month, yet the growth was not enough to erase fears about the downward trend of the world’s second biggest economy. China's official manufacturing PMI came in at 50.1 for April, slightly above the 50.0 forecast by economists. The index has remained above the crucial 50-mark threshold, which separates contraction from expansion, for the past two months. Manufacturing accounts for a large proportion of economic output in China, therefore the gauge is a bellwether sign of the economy’s health. Non-manufacturing PMI slid to 53.4 in April, down from 53.7 in the previous month. China's economy has been slowing for some time, with the nation’s GDP growing an annualized 7.0% last quarter, the weakest rate in six years and compared with the 7.4% expansion in the fourth quarter of 2014. Analysts said that an array of stimulus measures by Beijing, including interest-rate cuts and stepped-up spending, were at best stabilizing the China’s economy, which has been undermined by moribund domestic demand, an overbuilt property market and sluggish exports. More help for the economy is expected in the future but analysts expressed doubts about the effectiveness. Last week the government pledged to reduce import duties on a range of consumer goods and cut taxes on cosmetics and clothing to spur retail spending, while it also said it was lowering taxes on key resources, including rare earths. Also Politburo said it will step up targeted easing measures in an attempt to address the downward pressure on the economy.