Weak Data Sinks Cable, But is it Oversold?

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Market Drivers for March 12, 2013
Yen crosses rally in Asia but dip on opposition to Iwata by DPJ
UK IP, MP miss sending GBPUSD below 4850
Europe -.19% Nikkei -.28%
Oil $91.69/bbl
Gold $1581/oz.

Europe and Asia:
AUD NAB Business Confidence 1 vs. 3
JPY Consumer Confidence 44.3 vs. 43.0
EUR German CPI 0.6% vs. 0.6%
GBP NIESR GDP Estimate n/a
GBP Industrial Production
GBP Trade Balance

North America:
USD Monthly Budget 12:00

Its been another seesaw session in FX with yen crosses rising in Asian trade only to give up their gains by morning European dealing. USD/JPY hit a fresh yearly high in Asia rising to 96.71 on speculation that incoming BOJ chief may call a special meeting before April in order to expand QE further.

However, as Europe came online, reports that the DPJ may oppose the nomination of Deputy Governor Kikuo Iwata caused a quick and sharp sell off in yen crosses that dragged EUR/JPY below the 125.00 mark and send EUR/USD back below 1.3000 as a result. Mr. Iwata, who favors more government oversight over the BOJ is the most controversial of Mr. Abe’s appointments. Abe needs at least some support from the DPJ in Japan’s upper house in order to confirm Iwata’s nomination and despite the comments today, it is likely he will get it.

USD/JPY slipped below the 96.00 level as the European wore on. Any forward progress in the pair is now likely to come from US news rather than any fresh initiatives in Japan. Mr. Abe plan and his policy team are now well familiar to the market and have already communicated their key intended actions when they take power. So there is little new information from Japan that could push the pair higher.

On the other hand, if US economic performance continues to surprise to the upside, it could provide further fuel to the rally in USD/JPY which is why tomorrow’s US Retail Sales numbers could be the marquee event of the week.

Meanwhile in UK another set of horrid numbers from the manufacturing sector sent GBP/USD to fresh yearly lows below the 1.4850 level. UK Industrial Production declined by -1.2% versus 0.1% eyed while Manufacturing Production sank -1.5% versus 0.0% forecast. This was the worst reading since August of last year and suggests that the manufacturing sector will weigh heavy on Q1 GDP as the contraction accelerates.

Today’s data shows that the massive divergence between UK’s manufacturing and service sectors continues to expand with the former contracting sharply while the later remains relatively robust. Although manufacturing is a small part of the UK economy it will nevertheless impact the overall growth and as such remains an anchor across the neck of sterling.

Despite the negative news, sterling found some bids underneath the 1.4850 level and stabilized in the aftermath of the release. Although the UK data is undeniably atrocious, the pair is so grossly oversold that the downside may be limited. Given the weakness in PMI reading last week, some of the news may have already been factored in to the price and we could see a short covering rally as the day proceeds with longs targeting 1.4900 on a bounceback.

Boris Schlossberg
Managing Director

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