Why is Cable Bid?

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Market Drivers September 24, 2018
Cable strongest on the night
IFO beats slightly
Nikkei closed Dax -0.40%
Oil $72/bbl
Gold $1198/oz.
Bitcoin $6600

Europe and Asia:
EUR EU IFO 103.7 vs. 103.2
GBP UK CBI

North America:
No Data

It was a slow start of the week with Japan closed for the public holiday and most pairs holding very tight ranges in Asian and European trade. There was a little bit of risk off flows at the start of dealing in Asia after China announced that it would not attend the next round of trade talks and press reported that Trump administration was planning to ratchet the pressure on the country by considering yet more tariffs in the future.

Still, the reaction was muted at best and by European dealing the quintessential risk-off pair AUDUSD was nearly back to its opening levels. For now, the markets are viewing all the tariffs action more as theater rather than true economic action having only a minor impact on final demand. Indeed, today’s release of IFO survey was a case in point. The data printed at 103.7 versus 103.2 as the trade actions did not seems to dampen German corporate sentiment. An escalating trade dispute between the United States and China is creating little headwind for the German economy but is creating uncertainty among companies, Ifo economist Klaus Wohlrabe said.

Perhaps most surprising of all was the rebound in cable which crossed above the 1.3100 mark in London dealing and has not looked back. This despite no seeming progress on Brexit negotiations and slightly disappointing CBI data. CBI came in at -1 versus 7 as orders remained strong but companies were becoming increasingly fearful of hard Brexit possibility and have started to move from contingency plans to full preparations.

Nevertheless, cable remained well bid perhaps supported by news that German comments that a Brexit deal is still possible by November. The Europeans clearly have the upper hand in negotiations at the moment and UK may well need to give in to the Irish border issue demands in order to come up with a workable compromise but political consideration continue to frustrate PM May’s desire to get a deal done, so the complacency of the market may be unwarranted.

Still, after so many false turns in the Brexit story, the market default position appears to be to assume that some sort of a deal will be done and only react if a no-deal Brexit looks inevitable.

Boris Schlossberg
Managing Director

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