Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"We think it would be a mistake for the European Central Bank (ECB) to embark on QE, and we see no reason to believe it would effectively assist the crisis-hit countries of the Eurozone overcome economic stagnation and deflation”

-Biagio Bossone and Richard Wood

Today is a critical day, which may mark a change in the ECB’s history, as the central bank is widely expected to embark on broad-based quantitative easing in order to shield the region’s economy from deflation and revive the sluggish growth. Analysts expect a programme of sovereign-bond purchases to account for around 500 billion euros, others see the volume of 600-700 billion euro. Whatever the scale of QE will be, anything less would be likely a disappointment for markets. It is also predicted that purchases of sovereign debt will not be conducted under usual risk-sharing arrangements, whereby 19 national central banks share any losses in rough proportion to their economies’ size, making the Bundesbank to shoulder a quarter of any losses incurred by the ECB. In this instance, each central bank is likely to be responsible for buying bonds of its own country and will have to bear any losses on them on its own.

Some experts doubt effectiveness of the ECB’s programme in comparison to asset purchases schemes undertaken in other countries including the US, UK and to a lesser extent Japan. One of critics is ex-President of Bundesbank Axel Weber, who believe that the Euro zone’s inflation will remain below the ECB’s targeted level for a prolonged period of time, regardless of ECB President Mario Draghi attempts to boost consumer prices. Weber also is pessimistic about the Euro region’s economic growth prospects.

USD

“The strength is where you’d like to see it, in single-family housing”

- Brian Jones, a senior U.S. economist at Societe Generale

US housing starts soared more than expected in December, reaching the highest level in more than six and a half years. Groundbreaking for single-family homes surged 4.4% to a seasonally adjusted annual rate of 1.09 million units, according to the Commerce Department. November’s housing starts were also revised up to 1.04 million units. Construction started on new US homes advanced 8.8% to 1.01 million units in 2014 from the previous year, which is the highest level since 2007. However, total starts still remain far below an average pace of about 1.5 million over the 20 years leading up to the housing bubble's 2006 high. Housing has restrained an economic growth acceleration as sluggish wage gains put off first-time buyers from the market and force many young people to stay at home with parents or share accommodation with relatives and friends. However, strengthening labour market, low mortgage costs as well as improving consumer confidence will probably boost demand for residential real-estate. Faster wage gains and easier credit would help spur the housing recovery, benefiting sales and profits at builders. The number of building permits, however, dropped unexpectedly in the reported month. The Commerce Department said that permits issued last month fell by 1.9% to a seasonally adjusted 1.032 million units, down from November’s 1.052 million. Analysts, in contrast, had expected building permits to climb 1.3% to 1.055 million units in December. Permits have been above a 1 million-unit pace since July.

GBP

“The fall in near-term inflation might become more persistent if it lowered inflation expectations, pay and other cost growth in a way that became self-perpetuating”

- Bank of England

Two policy makers of the rate-setting Monetary Policy Committee, who insisted on the need to raise interest rates in the near term, changed their mind and joined those, who advocated for keeping rates unchanged, which raises speculation the Bank of England will refrain from raising interest rates until next year. Thus, nine-member panel unanimously voted to maintain the BoE’s interest rate at 0.5% and the size of its asset portfolio at 375 billion pounds. Martin Weale and Ian McCafferty, who repeatedly voted for a rate increase each month between August and December, dropped their campaign for higher borrowing costs. A precipitous fall in oil prices caused the UK consumer prices to drop to the lowest level in 14 years of 0.5%, far below the BoE’s inflation goal of 2%. The unexpected decline in inflation put deflation threat on the horizon. A separate data showed the unemployment rate unexpectedly dropped to 5.8%, with the number of people seeking jobless benefit declining for the 26th straight month. The number of people claiming unemployment benefit fell by 29,700 people, slightly above last month's figure. This resulted in a claimant count rate of 2.6%, in line with market expectations. The unemployment rate in Britain has been falling sharply over the last two years, from 8.4% in January 2012 down to 6.0% in the quarter to October last year. In its November Inflation Report forecasts, the Bank of England revised its outlook for the jobless rate down to 5.7% in the final quarter of 2014.

JPY

“If the BOJ is delaying its target without easing policy again, I think there will be some disappointment in the market”

- Daiju Aoki, an economist at UBS Securities

The Bank of Japan downgraded its next financial year’s inflation outlook amid precipitous drops in oil prices, which continue to see the central bank’s 2% goal slip further from achieving. Nevertheless, the BoJ decided to hold off from making any adjustments to its quantitative easing scheme, but expanded a loan programme aimed at spurring lending. Thus, the central bank kept its pledge to expand money base at annual pace of 80 trillion yen via purchasing government bonds and risk assets, the unchanged amount set in October when the bank adjusted its QQE programme due to easing inflation pressures and expectations. The ongoing plunge of oil prices, which have almost halved since October, has kept alive anticipation the BoJ will increase its monetary accommodation in the foreseeable future. Many policymakers are concerned of expanding QQE further with the bank's huge purchases already pushing five-year government bond yields into red territory. The BoJ now predicts consumer inflation of around 0.9% in the 2014 fiscal year compared with 1.2% estimated in October. The central bank's inflation outlook for the 2015 fiscal year was lowered to 1.0% from 1.7% previously. The BoJ is striving to reach medium-term inflation of 2%, after suffering from almost 15 years of deflation before the introduction of QQE. The BOJ revised upward next fiscal year's economic growth forecast to 2.1% from 1.5%, suggesting that an increase in growth will boost wages and accelerate inflation.

CAD

"The drop in oil prices is unambiguously negative for the Canadian economy”

-Stephen Poloz, Bank of Canada Governor

Major central banks around the world continue to surprise markets. The latest unexpected move came all the way from Canada, where the Bank of Canada suddenly lowered the target for its overnight rate by a quarter of a percentage point to 0.75%, for the first time since 2009, responding to the recent precipitous decline in oil prices, which is estimated to be negative for the Canadian economic growth and underlying inflation. The central bank forecasts that oil prices will rebound slightly to $60 per barrel over the medium term, but policymakers believed that the negative effect of lower crude prices would be gradually mitigated by a robust US economy, a weaker Canadian Dollar, and the central bank’s monetary policy decision. The BoC sees the economy to steadily recover in the second half of the year, with real GDP growth averaging 2.1% this year and 2.4% in 2016. The economy is projected to return to full capacity around the end of 2016, a little later than was expected in October.

On top of that, Canada’s wholesale sales unexpectedly declined in November, the first decrease in 11 months, driven by weaker sales of machinery and equipment. Wholesale shipments dropped 0.3% to C$54 billion, Statistics Canada reported, with machinery and equipment wholesalers posting a 2.8% fall in the reported month. Wholesale sales have risen 6.7% over the last 12 months, while the volume of sales, which strips out the impact of price changes, contracted by 0.3%.