Cable Shines, While DC Dithers

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Market Drivers for October 16, 2013
UK Claimant count best since 1997 but ILO remains the same capping cable rally
US inching towards resolution on budget/debt ceiling deal
Nikkei 0.18% Europe -.29%
Oil $101/bbl
Gold $1282/oz.

Europe and Asia:
AUD Westpac LEI -0.1% vs. 0.4%
UK Claimant count -41K vs. -24K
UK ILO 7.7%
EUR Trade Balance

North America:
USD NAHB 10:00

UK Labor data showed the biggest decline in the claimant count since 1997 pushing cable through the 1.6000 mark, but the rally stalled ahead of the 1.6050 level after investors were slightly disappointed by lack of improvement in the ILO rate.

Cable was the primary focus of the early morning European trade rising nearly 100 points off the session lows as currency markets responded to the sharp improvement in the claimant count data which declined by -41K versus -24K eyed. This was the best reading in 12 years and the twelfth consecutive monthly reduction in jobless rolls in UK.

The decline in joblessness however did not immediately translate into an improvement in the ILO unemployment rate which remained at 7.7% matching last month’s reading. Nevertheless, the drop in claimant count will likely lead to further reduction in the unemployment rate over the next several months and that should prove supportive for the pound given the fact that the BoE has tied its forward guidance on rates to unemployment figures.

Another minor disappointment in today’s UK labor numbers was the smaller than expected rise in Average hourly earnings which increased only 0.7% versus 1.0% eyed. Given the persistently sticky inflation rates of 2.5% or higher, UK workers are actually seeing negative income growth for now and that may temper spending going forward. Tomorrow’s UK Retail Sales data should provide an interesting glimpse into the strength of consumer demand.

In the meantime, cable remained bid above the 1.6000 level by mid-morning London trade and the pair could see further relative strength as the day proceeds if the US debt ceiling crisis moves closer to resolution.

With less than two days days left towards the US Treasury’s October 17th deadline, US legislators continued to negotiate furiously to strike a deal. As the last effort by GOP members of the House failed to take hold, the focus has moved back to the Senate where Harry Reid and Mitch McConnell appear to be close to an agreement. Speaker Boehner said that he would allow the Senate bill to be voted in on the House and that is will likely mean passage as moderate Republicans will join Democrats to produce a majority vote.

The markets appear nonplussed for the time being as “headline fatigue” has clearly crept in and perhaps the greatest surprise to any US budget deal may simply be a tepid reaction by the market as most of the news appears to be priced in. However, if US actually fails to reach a compromise and enters a technical default, volatility could spike sharply especially in USD/JPY which could quickly tumble towards a test of the 97.00 level as risk aversion fears reignite.

Boris Schlossberg
Managing Director

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