Cable Slumps as Data Disappoints- New Lows Ahead?

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Market Drivers for July 9, 2013
Greece gets approval creating positive risk sentiment at start of Europe
UK data misses woefully taking GBP/USD below 1.4900
Nikkei 2.58% Europe 0.81%
Oil $103/bbl
Gold $1255/oz.

Europe and Asia:
AUD NAB Business Confidence 0 vs. -1
NZD NZIER Business Opinion Survey 32 vs. 23
NZD NZ Card Spending 19.6B vs. 13.2B
GBP RICS House Price Balance 21% vs. 9%
GBP Industrial Production 0.0% vs. 0.3%
GBP Manufacturing Production -0.8% vs. 0.3%
GBP Visible Trade Balance -8.5B vs. -8.4B

North America:
CAD Housing Starts 8:15

News that Greece received approval for its next tranche of financing helped risk appetite at the start of European session trade lifting high beta currencies to their best levels of the day, but the rally ran out of gas after UK economic data badly missed its mark sending cable below the 1.4900 figure while dragging other euro and Aussie lower as well.

Greece secured an additional 6.8B euros in funding from the EC, ECB and IMF, but the money came with preconditions as the Troika noted that the reform program was moving too slowly. Greece will now have to pass legislation to comply with the terms of the financing and whether its can do that remains an open question.

Nevertheless the market took the news as a sign of relief and lifted the EUR/USD to within a few pips of the 1.2900 level before selling off slightly. One key sign of the relative complacency in FX regarding the euro is the recent rally in EUR/CHF. After making time for several weeks near the 1.2300 level, the pair has broken out to the upside, trading above 1.2450 in today’s session.

The relatively buoyant performance of EUR/CHF is a clear indication that for now the currency market is not really concerned about any sovereign debt flare ups in the region. Although euro remains near the lows of the year, its decline is driven largely by dollar strength rather than risk aversion as was the case in 2010.

In UK however, cable was pummeled by the surprisingly weak economic data as Industrial Production printed at 0.0% versus 0.3% eyed while Manufacturing Production contracted by -0.8% versus 0.3% forecast. The news was particularly given the steady improvement in UK PMI Manufacturing data and suggests that the recovery in the sector remain slow.

Cable tumbled through the 1.4900 barrier and remained there for the rest of the morning London session as sentiment towards the pair remained grim. Sterling is now once again within striking distance of the yearly lows near the 1.4800 level and if North American flows continue to push the unit lower, it could see a test of that level as the day proceeds. Cable is also being hurt by the action on the crosses as EUR/GBP was able to fill the longstanding gap at the 8600 level and has now broken out through 8650 with longs targeting 8700 in days ahead.

With no US economic data on the docket today, flows are likely to be driven by equity price action and any possible rhetoric from monetary officials. The dollar rally has seen a small correction that may continue as the day progresses, but the longer term trends still favor the buck especially if tomorrow’s FOMC notes reveal a more hawkish bias from the Fed.

Boris Schlossberg
Managing Director

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