Market Drivers January 23, 2013
UK labor data surprises to upside
AUD inflation cools
Nikkei -2.08% Europe 0.04%
Oil $96.70
Gold $1692

Europe and Asia:
AUD CPI 0.2% vs. 0.4%
GBP UK Claimant count -12.1K vs. 0.4K
GBP Unemployment 7.7% vs. 7.8%
CHF ZEW -6.9 vs. -15.5

North America:
USD HPI 9:00
CAD BOC rate decision 10:00

Risk currencies recouped some of their Asian session losses in quiet European trade marked by sharp short covering rallies and little fresh newsflow. Cable saw the biggest spike of the night rising from a low of 1.5800 to a high of 1.5882 in the wake of much better jobless claims numbers that surprised the market. The unit has been under relentless selling pressure for days and this mornings positive surprise served as catalyst for short to cover.

UK claimant count printed at -12.1K versus 0.4K expected – much better than forecast. The data from the month prior was revised lower as well to -8.9K while the unemployment rate declined to 7.7%. Employment rose 90,000 during the quarter through November, taking the total of people in work to 29.7 million, the ONS said. That’s the highest since records began in 1971. The employment rate of 71.4 percent is at the highest since February-April 2009.

The upbeat news on the labor front provided a rare bit of good news for the UK economy which has been plagued by chronically weak demand which will likely show yet another contraction in GDP in Q4 of 2012. One reason for the better than expected labor data is the fact that wage growth has been exceedingly modest. Wage increased at only 1.5% versus 1.6% forecast. Still an increase in jobs should translate into better demand as the year proceeds and should put UK GDP back in positive territory in Q1 of this year.

In addition to the labor data, the market also saw the release of the MPC minutes which showed no surprise as the committee voted unanimously to keep rates unchanged and 8-1 to keep QE at GBP375 Billion. The MPC also noted that sterling’s exchange rate may higher than warranted in order to rebalance the UK economy. However, the pair has come off nearly 5 big figures since the meeting, so the market did not react to the news.

After such heavy selling cable is due for a bounce and today’s positive economic results along with more supportive risk flows could provide the impetus for a rally towards the 1.5900 as the day proceeds.

Elsewhere Australian CPI printed markedly cooler than expected rising just 0.2% in the final three months of the year versus forecasts of 0.4%. The trimmed mean figure was also lower 0.6% versus 0.7% eyed. The biggest price rises of the quarter were in the communication and insurance and financial services sectors but they were were offset by falls in the cost of healthcare, furniture and food and drinks.

The very low price pressures in the Australian economy left plenty of scope for RBA to consider another 25bp rate cut at its next meeting in February, but the markets has assigned only a 34% chance probability that central will do so. One of the reasons why few market participants expect the RBA to act is the relatively steady pace of growth in China and the US which should keep global demand steady for the foreseeable future.

Nevertheless, the latest inflation news along with the weak labor data suggests that final demand in Australia has slowed significantly and will likely result in lower growth Down Under in Q1 of this year. Such a trend should keep pressure on RBA to ease further and will keep any rally in Aussie contained as the interest rate differential with the rest of the G-20 will continue to compress.

In North American trade today the focus will turn Northward with BOC rate decision at 1500 GMT. As our colleague Kathy Lien noted, “Since the last BoC meeting, Canada enjoyed very strong job growth along with an expansion in manufacturing activity. Unfortunately this has yet to translate into stronger trade or retail sales. Also, consumer prices declined in November. Based on these metrics, the Bank of Canada has little justification for talking about higher interest rates but we doubt they will shift away from their hawkish bias given the positive resolution to the U.S. Fiscal Cliff and the blowout job growth 4 out of the last 5 months because eventually this should translate into stronger economic activity for Canada. A reminder that the BoC is the only central bank talking about raising interest rates could put a bid underneath the Canadian dollar.”

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