Market Drivers Jan 11, 2013
Chinese CPI hotter puts a damper on risk rally
UK IP/MP misses badly prompting speculation of triple dip
Nikkei 1.40% Europe 0.17%
Oil $93.72/bbl
Gold $1669/oz.

Europe and Asia:
JPY Trade Balance – BOP Basis .23T vs. .31T
CHF Consumer Price Index -0.2% vs. -0.1%
GBP Industrial Production 0.3% vs. 0.8%
GBP Manufacturing Production -0.3% vs. 0.5%

North America:
USD Trade Balance 8:30
USD Monthly Budget Statement 14:00

UK Manufacturing and Industrial production data missed their estimates badly, sending cable to a three month low versus the pound as investors braced for the prospect of a triple dip recession in Q4. UK data was the primary event risk on an otherwise uneventful end of the week session that saw risk currencies hit some profit taking after a massive rally over the past several days.

UK Manufacturing printed at -0.3% versus 0.5% eyed while Industrial Production rose only 0.3% versus 0.5% forecast. The drop was led by metal products and electrical equipment as nine out of thirteen categories in manufacturing fell in the month of November. The data suggests that the UK manufacturing sector continues to struggle and is likely, along with construction to become a drag on UK GDP in Q4 of 2012.

We have long argued that cable’s strength was inconsistent with the poor economic performance of the UK economy, as the unit continued to benefit from safe harbor flows rather than investment demand. The currency market may be finally coming to the same conclusion as sterling hit fresh 3 month lows versus the euro in the wake of the disappointing news. The upward trend in EUR/GBP is likely to continue as cable continues to lag the other majors on the assumption that Q1 growth in UK will be considerably more challenging than in the rest of the G-20 universe.

Elsewhere Higher than expected CPI data cooled the rally in risk assets with high beta currencies all coming off their highs after a very powerful rally yesterday. Chinese CPI printed at 2.5% versus 2.3% eyed as it hit a 7 month high. Much colder than expected winter has caused price gains in food which flowed through to the consumer level. The PPI data on the other hand remained muted as price contracted by -1.9% in December.

The hotter Chinese inflation numbers still remain below the PBOC target of 3.5% and therefore are unlikely to cause any shift in policy, but the news did have an impact on investor sentiment, putting a damper on the massive rally as gains stalled in Asia.

With only US Trade Balance data on the docket in North American session, the choppy rangebound price action may continue into the New York open. The euro has risen more than 200 points over the past several days but has now stalled ahead of the triple top resistance at 1.3300 while Aussie managed to break through the 1.0550 barrier but is now unable to breach the key 1.0600 level. Another burst of risk buying could take the currencies to those level later today, but the melt up that we saw yesterday has clearly cooled and consolidation appears to be me the more likely bet.

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