Is Cable the Greatest Short Ever?

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Market Drivers January 31, 2020
Aussie breaks .6700
French data misses but euro holds firm
Nikkei -0.55% Dax n/a
UST 10Y 1.61%
Oil $53.1/bbl
Gold $1577/oz
BTCUSD $9046

Europe and Asia:
EUR GDP 0.5% vs. 0.4%
EUR CPI 1.8% vs. 1.7%

North America:
USD PI/PS 8:30
USD Chiacgo PMI 9:45
USD U of M Surveyt 10:00

Quiet night in FX land with data out of Europe showing mixed results while equity indices were slightly lower from their feverish highs in the wake of yesterday’s big earnings beat by Amazon.

In the currency market cable remained well bid with the pair climbing towards the 1.3150 mark after the BOE held rates steady yesterday. Today is the final day of the UK in the EU as the country begins its transition out of the union and already there are rhetorical battles going on about the prospects of a trade agreement with Michael Cove saying that the UK will not sacrifice on the fishery issue in order to get the trade deal done.

For now, the bulls have the upper hand in pound trade as markets are not at all focused on the trade issues at hand, but we continue to believe that cable could be the most vulnerable currency in G-10 this year if the negotiations go badly and the UK will spin out of the European market without a deal.

One of the factors that currency traders are underestimating is the prospect of a crash in the financial markets. It seems absurd to consider the idea of a steep selloff in equities as they remain near all-time highs, but that possibility of sharp correction is not at all improbable if the situation in China becomes worse and both global supply and demand are affected to a much greater degree than the current assumptions.

This could impact the UK economy most of all, not only because the UK is the primary financial intermediary between Asia and North America but also because its an economy inherently levered to financial assets. So a double whammy of decline in financial assets coupled with no deal with its biggest trading market could literally cripple the UK economy overnight and send rates to zero by year-end.

For now, the market is not even entertaining the notion of such an outcome as it tries to bid cable towards its recent highs of 1.3500 but should events develop as we imagine the turn in sentiment against the pair will be swift.

On the more immediate front, the Aussie remained the weakest currency in G-11 with the dropping below the .6700 level as coronavirus cases continued to pile up and Chinese authorities pushed back the factory reopenings in many regions to February 10th. Analysts from Goldman Sachs have estimated that the current pandemic outbreak could shave 0.4% off Chinese GDP but given the scope of the response that could be a gross underestimation of the economic impact and the move in the Aussie suggests that currency traders are far less sanguine that the analysts about economic prospects going forward. The shorts will now try to test the key .6500-.6600 support which has been in place for years.

On the eco calendar, the US has Personal Income and Personal Spending on tap as well Chicago PMI and U of M data. USDJPY continues to hold bid around the 109.00 level but much of its resilience depends on stocks which look a little wobbly this morning. If equity investors decide to sell ahead of the weekend the pair could quickly tumble through 108.50 as the day unfolds.

Boris Schlossberg
Managing Director

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