No Mercy for Cable as BoJo Plays Tough

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Market Drivers December 17, 2019
Cable drops two big figures
UK labor data mixed
Nikkei 0.47% Dax -0.56%
UST 10Y 1.863%
Oil $60/bbl
Gold $1478/oz
BTCUSD $6914

Europe and Asia:
UK Claimant Count 28K vs. 24K
UK Wages ex-bonus 3.2% vs. 3.4%

North America:
USD Housing Starts/Permits 8:30
CAD Manufcaturing Sales 8:30

Cable plunged two big figures in Asian and morning London trade today after Boris Johnson signaled that the UK would crash out of the European Union at the end of 2020 whether it had a deal or not.

Mr. Johnson put forth a bill in Parliament that removed Parliament’s right to vote for an extension, negotiate on worker’s rights and provide oversight on trade negotiations. In short Mr. Johnson has stripped Parliament of any oversight authority in Brexit negotiations as he drives a hard line with Brussels.

Many analysts have noted that this negotiating stance could lead only to Canada-type deal that would focus primarily on the free flow of goods rather than services. While such an arrangement would avert the worst of the crash-out scenario as it would keep the UK vital supply lines intact it may also leave the market with much greater uncertainty.

The UK economy is almost wholly depended on services and most specifically financial services, so it would be highly problematic for UK to be locked out of the EU financial markets and could even result in the wholesale transfer of the UK banking sector to Ireland or Netherlands. We seriously doubt that the city of London would go quietly in such a scenario but Mr. Johnson’s moves today heightened the risks of this outcome and are the primary reason for the pound’s collapse.

Meanwhile, the economic data in the UK continues to be mixed with the latest labor data showing that vacancies fell below 800,000 for the first time in two years but wages grew at their slowest pace since 2018. The pattern in the UK seems to mirror the rest of the Anglo Saxon world where jobs are plentiful but salaries are skimpy and that dynamic is likely to keep consumer spending muted for the time being.

Several analysts have pointed out that Mr. Johnson’s tough-guy persona may begin to falter if UK economic data deteriorates, so going forward the market may begin to pay more attention to the monthly economic releases, not for their implication regarding monetary policy but rather fo their political influence on Brexit negotiations.

For now, the pair appears to have found a modicum of support near the 1.3150 level, although massive technical damage has been done in the last 12 hours and the best case upside scenario suggests that cable could now settle into 1.3200 -1.3500 over the holiday season. But with sentiment towards cable now clearly much more cautious any further saber-rattling by Mr.Johnson could quickly push the rate towards the key 1.3000 support before the year-end.

Boris Schlossberg
Managing Director

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