Cable Pops as Carney Sticks to Convention

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Market Drivers for Feb. 7, 2013
Carney testimony not nearly as dovish as expected, cable rallies
Australian employment weaker than headline suggests
Nikkei -.93% Europe 0.60%
Oil $96.90/bbl
Gold $1677/oz.

Europe and Asia:
AUD Employment 10.4K vs. 5.8K
UK IP 1.1% vs. 0.7%
EUR German IP 0.3% vs. 0.2%

North America:
US Unemployment claims 8:30 AM

The eagerly anticipated testimony of incoming Bank of England governor Mark Carney proved to be far less dovish than the market thought sending pound through the 1.5700 level in morning London trade as a relief rally sent shorts running for cover. Ahead of the testimony many market participants speculated that Mr. Carney who was the former head of the Bank of Canada, would propose a radical new direction for UK monetary policy perhaps even implementing such unorthodox measures as GDP targeting.

However, Mr. Carney’s written responses to the Treasury committee questions seemed to suggest a much more conventional approach noting that the two core responsibilities of the central bank were price stability and financial stability seeming to emphasize the need for markets to have confidence in the capital markets.

Mr. Carney did not address such controversial issues such as monetization of UK debt or direct targeting of the GDP but did note that there must be a need for quick debate on the framework of monetary policy in order to limit uncertainty. In short Mr. Carney appears to be willing to entertain fresh ideas regarding UK monetary policy, but his emphasis on the fact that the bar to altering flexible inflation targeting as practiced in Canada and UK is very high, suggests that he will move cautiously on any new policy initiatives.

Cable initially soared on the release of Mr. Carney’s remarks as market participants breathed a sigh of relief that the incoming Governor will not make wholesale changes to the current policy. The pair spiked to 1.5770 in an initial burst of enthusiasm, but has since settled near the 1.5700 level as it continues to base around those levels. Cable has been under enormous selling pressure since the start of the year and perhaps today’s circumspect testimony from Mr. Carney along with better than expected IP data could help the pair stabilize and target the 1.5800 figure as the day proceeds.

Elsewhere Australian employment printed in line with expectations but the underlying data was weaker than the headline reading keeping downside pressure on the unit. The Aussie initially spiked to 1.0340 on news that employment rose by 10.4K versus 5.8K eyed but then quickly dropped off its highs as traders looked underneath the data.

Australian job picture did improve expanding after last month’s contraction of -3.8K. The unemployment rate also remained steady at 5.4% versus 5.5% forecast while labor participation declined a bit to 65% from 65.1%. However all of the gains came from part time rather than full time jobs. Full time jobs declined by -9.8K suggesting that labor demand Down Under is slowing which could have negative implications for the overall economy in H1 of this year.

Currency markets remain wary of the Aussie and the prospect of further rate cuts from the RBA as the year develops. The unit is now under attack on two fronts – it is losing its luster as repository of safe haven funds as the situation in Europe improves and it also becoming less attractive on interest basis as rate differentials continue to contrast.

The Aussie remains mired near the 1.0300 level and a break below 1.0290 could open the path towards a test of 1.0250 while 1.0350 caps any upside potential for now.

Boris Schlossberg
Managing Director

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