Softer Labor Data Stops Cable Rally; Will BOC Ease?

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Market Drivers July 15, 2015

UK Labor shows first uptick in claims since 2012
CNY data stronger than expected but market skeptical
Nikkei 0.38% Europe -0.16%
Oil $52/bbl
Gold $1153/oz.

hope but
Europe and Asia:
AUD New Motor Vehicles 3.8% vs. -0.8%
CNY GDP 7.0% vs. 6.8%
CNY IP 6.8% vs. 6.0%
GBP UK Claimant Count 7K vs -8.9K
GBP UK Wages 3.2% vs. 3.3%

North America:
USD PPI 8:30

CAD BOC 10:00

UK Claimant count rose for the first time since 2012 putting a dent into the pound rally in early London trade today, but the pair held above the 1.5600 level buoyed by recent hawkish talk from the MPC.

UK claimant count rose to 7.0K from -8.9K eyed while the unemployment rate increased to 5.6% from 5.5% forecast. Even the average wages earned missed their mark printing at 3.2% vs. 3.3% – but were still considerably better than the 2.7% the month prior. The labor data shows a slight slowdown in UK demand but the market appeared unconcerned especially since wage continued to rise at healthy pace.

Perhaps the most surprising aspect with respect to cable this week was decidedly hawkish turn in rhetoric by various MPC members. Yesterday BoE Governor Mark Carney stated that rate hikes were coming sooner rather than later and that bombshell was followed by speech from the usually dovish Miles who went out of his way to note that BoE did not need to follow the Fed and could establish its own path towards rate normalization.

The central bank talk has given sterling just the boost it needed and the pair is now squarely back in the uptrend having made a higher low at the 1.5400 figure. The pair still faces stiff resistance at 1.6000, but if the market begins to believe that BoE could be the first G-7 central bank to move on rates the rally in cable could be just beginning.

Meanwhile in Asia the Chinese data printed much better than expected but was met with a wave of skepticism. Chinese GDP rose to 7.0% from 6.8% eyed while Industrial Production increased to 6.8% from 6.0%. But markets shrugged off the news dubious as to its accuracy with Aussie coming off the highs at 7496 to trade back towards 7450. Even Shanghai was off markedly ending down -3.54% for the day.

The correction in Chinese capital markets is far from over and despite officials best efforts to stabilize matters the loss of capital is sure to impact demand going forward with the second half of this year likely to be challenging.

In North America today, the primary focus will be north of the border as the Bank of Canada has its monthly meeting. With oil prices diving the Canadian economy appears to be on the verge of tipping into a recession and it will be interesting to see if Governor Poloz hints at further easing or acknowledges that the recent Iran accord may have downward pressure on energy prices going forward. If the BOC does strike a dovish pose then USD/CAD could explode to the upside with 1.3000 figure now in view.

Boris Schlossberg
Managing Director

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