Cable Crashes on Talk of Article 50 Trigger

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Market Drivers October 3, 2016

Cable drops below 1.2900
UK PMI beats handily
Nikkei 0.90% Dax 1.01%
Oil $48/bbl
Gold $1318/oz.

Europe and Asia:
EUR EZ Manufacturing PMI 52.6 vs. 52.6
GBP UK Manufacturing PMI 55.4 vs. 52.1

North America:
CAD Manufacturing PMI 8:30
USD ISM Manufacturing 10:00

Cable was crushed today in early London trade dropping more than a 100 pips off Friday’s close after reports over the weekend suggested that the government of PM May was ready to invoke Article 50 as early as March of 2017.

Speaking to her Conservative party faithful PM May stated that, “We are going to be a fully independent, sovereign country – a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts.

“And that means we are going, once more, to have the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration.”
The emphasis on immigration rather than trade suggests that UK leaders are willing to sacrifice access to the common market in exchange for greater sovereignty and while that stance may resonate politically it is very likely to cost UK some economic growth as its unfettered access to the EZ will be eliminated.

Ironically enough in the short term the UK economy is benefiting from the current course of events as the lower pound continues to spur manufacturing demand. Today’s UK PMI reading was sharply higher than forecast coming in at 55.4 versus 52.1 projected. As we noted a few week’s earlier presently, the UK is enjoying the best of both worlds as its firms have full access to the European market but while seeing their exports becomes instantly competitive after pounds 15% decline since Brexit vote.

This dynamic may last for another quarter or two, but will eventually turn against UK as the EZ erects new trade barriers against the country. More importantly the market will next look to Wednesday’s UK PMI Services report which comprises the vast majority of the UK economy and which not nearly as sensitive to exchange rate fluctuations. If the services sector shows a decline rather growth cable could test its post Brexit lows of 1.2790 by mid week.

Meanwhile in US the focus will be on ISM Manufacturing which is expected to rise to 50.4 from 49.4 the month prior. Any bump into expansionary territory should help the greenback as it will suggest that US economy remains on track for a rate hike and if the number comes in line or better USD/JPY could push towards the 102.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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