Is Cable Carving Out A Bottom?

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Market Drivers Feb. 1, 2016

Chinese PMI below 50 for lowest stretch on record
UK PMI better
Nikkei 1.98% Eurostoxx -0.62%
Oil $33/bbl
Gold $1121/oz

Europe and Asia:
CNY Manufacturing PMI 49.4
GBP UK PMI Manufacturing 52.9 vs. 51.8
EUR GE Final PMI 52,3 vs. 52.1

North America:
USD CPI 08:30

CAD RBC Manufacturing 09:30

USD ISM Manufacturing 10:00

It’s been a quiet and listless night of trade in the currency market at the open of the week with most of the majors stuck in relatively narrow trading ranges consolidating their moves from last week.

In Asia, the news out of China remained negative with the official PMI Manufacturing report sinking to a 6 month low of 49.4. This is the longest time on record that the PMI Manufacturing reading remained below the 50 boom/bust level indicating that demand in the region continues to slow.

Confirming that notion was the fact that South Korean exports have fallen to a 6,5 year low as they declined by more that -18% on a year over year basis. South Korea is considered to be the “canary in the coal mine” for Asia because the country is highly sensitive to changes in demand for the region and indeed its export readings are even used to gauge global demand because of its active position in world trade. The fact the South Korean exports have slowed so markedly bodes badly for growth going forward and suggests that G-10 central banks will have to revise their forecasts downward.

In UK the data was mildly better, but cable did not respond to the news. The UK PMI printed at 52.9 versus 51.8 a significant improvement over forecast with new orders showing expansion for 35th month in a row as they popped to 52.5 versus 62.3 prior. This was the first beat of expectations for UK PMI in four months as the decline in cable must be having some positive impact on export demand. Still, sterling saw no follow through on the news and after popping through the 1.4300 level, the pair quickly retreated.

Cable continues to be dogged about concerns over Brexit and although the latest polls show that the general public is starting to favor staying in the European union, the market remain nervous. The latest wrangling in Brussels between UK PM David Cameron and EU officials about the terms of the deal only serves to exacerbate investor concerns. Still with cable so badly beaten and with political tide seeming to turn against the Brexit idea, the prospect of a sharp short squeeze on any potential good news is a real possibility over the next few weeks.

In North America today the focus will be on CPI, Personal Spending and ISM Manufacturing data, There is a real chance that the data could disappoint on all three fronts with CPI readings especially key to the market. CPI is projected to be only 0.1% on a core basis, but the number prints at 0.0% or less the pressure on the Fed to stop any further rate hikes will increase exponentially as the news would suggest that deflationary forces have once again taken hold. On the other hand if the numbers are better USD/JPY could push towards the 122.00 figure as the day proceeds as the spreads between JGBs and USTs is sure to widen.

Boris Schlossberg
Managing Director

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