Cable Hammered As Fears Grow of Contraction

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Market Drivers November 22, 2019
Cable dips below 1.2900 on weak PMI
EU PMI mixed
Nikkei 0.32% Dax 0.17%
UST 10Y 1.755%
Oil $58/bbl
Gold $1471/oz
BTCUSD $7155

Europe and Asia:
EU PMI 46.6 vs 46.6
UK PMI Services 48.6 vs. 50.1

North America:
CAD Retail Sales 8:30

Cable was hammered in London dealing falling by more than half-cent after UK PMI data revealed that business conditions have deteriorated materially.

UK PMI missed on Manufacturing and Services parts coming in below the key 50 boom/bust level on both. According to Markit, “Lower private sector output has now been recorded in two of the past three months, with the latest survey signaling the sharpest rate of decline since July 2016. The overall reduction in business activity reflected modest falls in both manufacturing and service sector output. Reports from survey respondents largely attributed weaker domestic economic conditions to a lack of clarity in relation to Brexit, alongside a fresh injection of business uncertainty from the forthcoming general election. In the manufacturing sector, there were also reports that customer overstocking ahead of the Brexit deadline on 31st October had acted as a headwind to production volumes in November.”

The news quickly shaved 50 pips off cable as the pair tumbled below 1.2900 but so far it has found support ahead of the 1.2850 level. The key question is whether the weakness in UK economy is temporary due to Brexit and election concerns or whether the bigger structural difficulties of exiting the EU are finally starting to weigh on the UK economy. We suspect the later and it is very likely that UK economy could contract in Q4 of this year and put the BoE on a rate-cutting path.

Therefore contrary to popular opinion, instead of staging a relief rally should Boris Johnson and the Tories win a majority in the Parliament sterling could tumble to 1.2500 on growing fears of a Brexit recession.

Elsewhere today the market will get a look at Canadian Retail Sales which are projected to fall by -0.3% versus -0.1% the month prior. If the data does print soft loonie can weaken 1.3300 once again. So far 1.3300 has been a cement ceiling for USDCAD and yesterday’s modestly hawkish statement from Poloz helped keep the resistance in place, but if the eco data continues to weaken the BOC will have no choice but to cut rates further and will likely propel USDCAD towards 1.3500 by the end of the year.

Boris Schlossberg
Managing Director

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