Daily Forex Fundamental Overview
Key highlights of the week ended March 4
The Euro zone's growth and inflation prospects have weakened and policy makers should take these developments into account when deciding on monetary policy. Inflation across the currency bloc slid into negative territory in February, virtually ensuring the ECB will unveil additional stimulus when it reviews policy on March 10. Meanwhile, Bank of France Governor Francois Villeroy de Galhau said that the ECB is ready to deploy fresh stimulus measures to underpin worryingly low inflation. The central bank's tools include targeted loans to commercial banks, more asset purchases and providing more details about how long the ECB plans keep rates at low levels. Mr. Villeroy de Galhau noted that the brief period of negative inflation does not mean the arrival of a more prolonged period of falling prices. Inflation should turn positive again later this year with the stabilization of oil prices.
The RBA left the official cash rate unchanged after assessing an effect recent global financial turbulence has had on domestic growth, but kept doors open for further monetary policy easing if economic conditions worsen substantially. The central bank kept the cash rate at record low of 2%. Meanwhile, the Australian economy beat all expectations, growing at the fastest pace in almost two years in the final quarter of 2015, a sign the worst of the global commodity rout may be over. Australia's economy rose 0.6% in the fourth quarter from the July-September period, when the economy grew an upwardly revised 1.1%, outpacing economists' forecast for a 0.4% growth, according to the Australian Bureau of Statistics. That propelled growth for the whole year to 3%.
Canada's economy slowed the most among the Group of Seven developed countries in 2015, highlighting the effect of the commodity-price shock on the trade-reliant country and the challenges its policy makers face in supporting growth. Canada's gross domestic product increased 0.8% on annualized basis in the fourth quarter, down from the 2.4% growth rate in the July-September period. The biggest drag on growth was business investment, which dropped 1.7% from the preceding three-month period and declined for the fourth straight quarter.
Switzerland's economy unexpectedly accelerated, while exports showed signs of resilience in 2015, despite a strong Swiss Franc, migrant crisis and adverse external environment undermined the country's performance. The Swiss economy expanded 0.4% in the fourth quarter of 2015, supported by consumption expenditure from private households and the public sector. Quarterly estimates suggest a provisional GDP growth rate of 0.9% for 2015, compared with 1.9% in 2014.
"The final PMI numbers for May have come in slightly ahead of the earlier flash readings, but still point a Eurozone economy, which seems unable to move out of low gear".
- Chris Williamson, Markit chief economist
The latest release on business growth in the single currency remained soft for the previous month, showing undoubted evidence that the strong expansion at the beginning of the year has already lost its pace. Also, ultra-loose monetary policy rate left unchanged by the European Central Bank on Thursday is pushing companies still cut its prices in May, as they have done for at least five years. Meanwhile, the Euro zone services PMI advanced to 53.3 from 53.1 reported in the preceding month and the composite went up to 53.1 from 52.9. The following data shows, that services reading improved slightly over the month, and continue to show its amelioration, versus a slight deceleration suggested by the initial numbers.
In the meantime, national EU data was mixed. The Italian services PMI returned back into contraction phase at just 49.8 while the overall composite Italian PMI is hardly holding above the major line at 50.8 is worrying. The French readings also were revised down, however, German and Euro zone data, in turn, were revised higher. Overall, high uncertainty and gloomy forecasts remains on the market, while additional disappointing releases could lead to the additional concerns over the ECB's failure to announce new measures.
"The U.S. nonfarm payroll data was crazy and completely unbelievable and this is the last set of important data before the Fed meeting. When you look at the data set, it really boggles your mind because the unemployment rate has ticked lower. The productivity picture is even more confusing as it is not increasing".
- Naeem Aslam, Chief market analyst at Think Forex UK
The last Friday's US economy release proved to be unexpectedly disappointing since the employment picture showed the weakest payroll gains for at least six years. According to the data, the non-farm payrolls advanced by a seasonally adjusted 38,000 for the previous month, strongly below a revised of 123,000 figure registered for April as well as strongly below expectations for an acceleration of about 160,000. Overall, employers employed 59,000 fewer workers in March and April than previously reported. Majority of economists agreed that following Friday's disappointing US employment report could eliminate the chance that Fed officials would tighten policy during their meeting on June 14-15 in Washington as well as may make it difficult raise the rate in July.
The report, which was also released in the same day by the Labor Department is unemployment rate which went down to 4.7%. Meanwhile, following rate does not include those who did not actively look for employment or the underemployed who were working part time for economic reasons. The following data demonstrates the harshest drop in almost nine years since people abandon the labour force. Overall, the steep decline in the labour force during the last couple months of course defies hopes that disenfranchised workers are going to return to the jobs market.
"The PMI surveys show that the pace of economic growth remained subdued in May, as 'Brexit' worries exacerbated existing headwinds"
-Chris Williamson, Markit Chief Economist
The United Kingdom May services purchasing managers' index rose more than expected, rebounding from a three-year low in April, which signalled increasing optimism over the health of the British economy. A report of market research group Markit showed that the situation with UK services PMI was more upbeat than expected with 53.5 points growth from 52.3 in April, while economists had forecast a score of 52.5. Activity has risen every month since January 2013 and the latest rate of growth was the slowed seen over the past three years. Services make up for almost 80% of the total gross domestic product, data showed, and this were the good news from the biggest sector in the UK despite the upcoming EU Referendum. Moreover, data remained well above the 50-point mark, indicating an expanding economy. Expectations for activity over the next 12 months strengthened despite the slowest gain in new business in the current 41-month sequence, and were contingent on the outcome of the June 23 EU membership referendum
Nevertheless, despite the better-than-expected PMI figure, research group Markit has warned markets of a possible surprise following the June 23 Brexit referendum on the UK's membership in the European Union. Markit also highlighted that it was the slowest gain in new business in the 41-month growth sequence and that hiring was at a 33-month low.
"anadian growth will likely be negative in the second quarter, and net exports will be contributing to that decline"
-Robert Kavcic, Bank of Montreal Canada ran a near-record trade deficit in April as the economy continued to struggle with weak crude oil prices that have slashed the value of exports and curbed growth. The deficit, announced by Statistics Canada, was the 20th in a row—$2.9 billion compared with March's revised deficit of $3.2 billion. Data was greater than the $2.5 billion shortfall forecast by analysts. The shortfall narrowed from the previous month as exports rose 1.5% from March on a slight recovery in oil prices and increased natural gas shipments to the United States. Volumes rose by 0.5% while prices grew by 1.1%.
Meanwhile, a separate report by Statistics Canada showed that labour productivity rose in the first quarter at its fastest pace in over a year. The labour productivity of Canadian businesses grew by 0.4% in the first quarter of 2016 after recording no growth in the fourth quarter of 2015. Moreover, the increase matched the forecast by market analysts. In addition, data showed that real gross domestic product of businesses grew by 0.6% in the first quarter after a flat fourth quarter, in part because output of goods-producing businesses resumed growth after a decline in the fourth quarter. The number of hours worked increased by 0.2% after remaining virtually unchanged the previous quarter. Overall labour costs per unit of production dropped by 0.3% as productivity growth outstripped the increase in wages.