Morning Forex Fundamental
Overview of the previous week, this week's key events
Another signs that the Swiss economy remains highly vulnerable to the on-going financial and sovereign debt crisis in the neighbouring Eurozone have emerged during the last week, as the Swiss National Bank decided to retain the currency ceiling at 1.20 per Euro, highlighting risks to the economy from external developments. The SNB President Thomas Jordan pointed out that a highly valued Swiss Franc may compromise price stability and is posing serious consequences for the economy. Therefore, the minimum exchange rate remains a priority, in order to avoid an undesirable tightening of monetary conditions and implementations of strict austerity measures for Switzerland. In the meantime, the target range for the three-month Libor was also put on hold between 0.0% and 0.25%, as economic conditions are expected to gradually improve both in Switzerland and in the world economy over the next 12 months. Amid certain risks to economic recovery, investors' demand for the Swiss Franc was not so high and the EUR/CHF closed at 1.225 on Friday.
Moreover, another important event that is likely to have a long-term impact on the financial markets was the announcement of the Fed's Chairman Ben Bernanke that the central bank is ready to begin winding down its unprecedented easing programme later this year. The QE tapering might begin at the end of 2013 and will be completely halted by the middle of the next year, if the world's largest economy continues to perform in line with the central bank's expectations. However, recent data raised concerns that the economy still struggles to grow as it was expected, as the number of initial jobless claims rose more than expected, while activity at manufacturing sector slowed. Therefore, the Dollar Index rose for the third consecutive day on Friday, after surging 1% on June 19 when the Federal Open Market Committee left the monthly pace of bond purchases at $85 billion.
During this week a series of economic reports will show GDP data from the U.S., the U.K. and Canada. However, the data is not expected to show any improvement in any economy. The only economy that can show a better-than-expected performance is Britain. According to analysts' expectations, the economy has expanded by 0.3% in the first quarter of this year, but recent data is showing that the economic recovery is on hold. Moreover, the BoE has decided not to expand its asset purchase programme during the last policy meeting, while Britain's retail sales bounced back more than initially was expected in May, as consumers spent more online and on food, adding to evidence of acceleration in economic growth in the second quarter of 2013 and providing some relief for the central bank.
'This rounds off another disappointing quarter for the Eurozone economy. We are expecting GDP, if in-line with these numbers, will contract by 0.2 per cent which is similar to what we saw in the opening quarter' - Rob Dobson, senior economist at Markit
The Eurozone current account surplus rose more than expected in the middle of spring, surpassing analysts' expectations of a 14.2 billion euros surplus by more than 5 billion, boosted by trade with goods. The European Central Bank said on Friday that the seasonally adjusted current account of the EU reached a surplus of 19.5 billion, down from a figure of 25.9 billion in the preceding month. Data also showed that the difference between exported and imported goods stood at extra 18.1 billion euros, while trade with services saw an excess of 8.2 billion euros.
While latest data is suggesting strong export of some Eurozone states, they also point to the repressive effect of unpopular austerity measures that not only does not help to stabilize the region's economy, but led to the 18 months of contraction and had a negative effect on people's demand and willingness to increase spending. Earlier this month survey by the European Union's official statistics office Eurostat showed that the Eurozone retail sales dropped 0.5% on the month and tumbled 1.1% from a year earlier. During the 12 months ending in April, the region's current account surplus accounted around 1.8% of economic output, compared with 0.4% in the preceding year.
"It's a shot heard round the world for global investors -- a reminder that QE is in fact going to end one day' -Chris Rupkey, the chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd
The Federal Reserve is widely expected to start trimming its asset-purchase programme, also known as quantitative easing, to $65 billion already in September, and announce an end of buying in June 2014, the plurality of estimates from economists is suggesting. A survey was conducted soon after the Fed's President Ben Bernanke latest press conference, where he signalled a timetable for ending one of the most aggressive stimulus measures in the Fed's history. Economists now predict a faster reduction in bond-buying from current $85 billion a month: 44% are expecting a tapering in September, compared with 27% in the previous survey conducted in the beginning of June.
Also this week Federal Reserve Bank of St. Louis President James Bullard expressed his concerns that Bernanke has chosen an inappropriate time for announcing a possible tapering of QE. Bullard is now dissented from Bernanke's statement, saying policy makers should introduce more actions to signal they are determined to reach their inflation goal in light of weak growth of consumer prices. According to Bullard, it is a mistake to make such important announcements in the same day with marking down projections of economic growth and inflation for this year.
'With borrowing still at very high levels, next week's spending review is a reminder of how much austerity still lies ahead' - Vicky Redwood, chief U.K. economist at Capital Economics Ltd.
Britain's public sector net borrowing that exclude financial interventions, reached £8.8 billion last month, less than initially expected, affected by multi-billion pound cash transfer to the Treasury. Analysts, however, expected a £12.6 billion figure. According to the report from the Office for National Statistics, the first tranche of money total £3.9 billion was transferred from the BoE's Asset Purchase Facility Fund, while the second transfer estimated £3.2 billion from one-off tax payments by banks from Switzerland.
During the 2012-2013 year public sector borrowing stood at £118.8 billion, up from £118.5 a year earlier. At the same time, public sector net debt, which is considered as a measure of the total amount the nation owes, jumped to £1.19 trillion, compared with £1.1 trillion a year ago. It means that the total debt has now surged to 75.2% of the nation's gross domestic product, up from 71.1% of GDP at the end of May 2012. Recent figures are adding pressure on Chancellor George Osborne, before the next Wednesday's meeting in regards with the government's spending for the 2015-2016 financial year. Meanwhile, Osborne has managed to save only £3.6 billion of the required figure and still needs to reach an agreement with the nation's Ministry of Defense, amid concerns that further cuts are likely to jeopardize front-line capabilities.
'Japan's economy is likely to resume a moderate recovery as overseas growth picks up moderately and domestic demand remains resilient due to the effect of monetary easing and various stimulus measures' - BOJ Governor Haruhiko Kuroda
The Bank of Japan Governor Haruhiko Kuroda said that Japan's policy members are closely watching moves of long-term interest rates and expressed the BoJ's readiness to take additional monetary-easing measures if the economy does not gain momentum as expected. During April's policy meeting Kuroda introduced unprecedentedly huge quantitative easing aimed at buying a large number of government bonds from financial institutes in order to lower long-term interest rates. Kuroda stunned market by promising to inject $1.4 trillion into the struggling economy in less than two years and claimed his readiness to reach 2% inflation in roughly two years. Nevertheless, despite all measures and efforts interest rates surged to a level higher than before the policy was introduced.
At the same time Kuroda pointed out that financial market will stabilize over time, reflecting overall improvement in Japan's economy. Meanwhile, Japan's central bank expressed its concerns that a high degree of uncertainty regarding the nation's economy still remain, including debt and financial crisis in the Eurozone, slow economic recovery in the U.S. as well as risks from emerging and commodity-oriented countries. Despite all difficulties Kuroda is sure in achieving the price stability target of 2% and said there are already signs of improvement.
'We don't think it's likely that the Canadian economy can lean on the consumer to generate much growth going forward' - Ian Pollick, a senior fixed-income strategist at Royal Bank of Canada's capital markets unit
A bunch of economic data from Canada was unveiled on Friday, reflecting weak domestic demand and vulnerability of economic recovery, data from the Statistics Canada showed. The nation's inflation rate accelerated at a slower-than-expected pace, as a jump in natural gas prices was partly offset by a fall in transportation costs. A gauge of consumer prices climbed 0.7% last month from the same month a year earlier, following a 0.4% gain in April that was the slowest since October 2009. The core inflation, which excludes eight most volatile products, surged 1.1%, the same pace as in the prior month. Analysts, however, expected both inflation and core inflation to accelerate more, calling for 0.9% and 1.2% readings, respectively. The main reason for a weaker reading was a 15.4% jump in natural gas prices, which recorded the biggest monthly increase since December 2008.
Also Friday Statistics Canada said that sales at Canadian retailers rose less than expected in April, due to a decline in gasoline and clothing sales that even offset an increased spending on new vehicles, electronics and appliances. The value of sales edged higher 0.1% totalling 39.52 billion Canadian dollars, compared with an unrevised flat reading in March. Meanwhile, sales excluding vehicles and auto parts shrank by 0.3%.
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This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.
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