Cable Hammered as Hopes For Quick Hike Fade

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Top Stories

  • Moody's puts AUD and NZD bank on review for possible downgrade
  • UK jobless increase, BoE dovish in its inflation report
  • Nikkei up .57% Europe up .6%
  • Oil below $85/bbl at $84.88 last
  • Gold at $1376/oz.

Overnight Eco

  • AUD MI Leading Index m/m 0.8% vs . 0.0%
  • AUD New Motor Vehicle Sales m/m -1.9% vs 1.0%
  • JPY Tertiary Industry Activity m/m -0.8^ vs . -0.5%
  • GBP Nationwide Consumer Confidence 47 vs. 49
  • GBP Claimant Count Change 2.4K vs. -3.2K
  • GBP Average Earnings Index 3m/y 1.8% vs. 2.0%
  • GBP Unemployment Rate 7.9%

Event Risk on Tap

  • CAD Foreign Securities Purchases expected at 7.22B
  • CAD Leading Index m/m expected at 0.3%
  • CAD Manufacturing Sales m/m expected at 2.3%
  • USD Building Permits expected at 0.57M
  • USD PPI m/m expected at 0.9%
  • USD Core PPI m/m expected at 0.3%
  • USD Housing Starts expected at 0.55M
  • USD Capacity Utilization Rate expected at 76.5%
  • USD Industrial Production m/m expected at 0.6%

Price Action

  • USD/JPY trades very tight range of 83.50-83.70
  • AUD/USD sells off below parity on possible downgrade of AUD banks
  • GBP/USD drops through 6050 as hopes for hike fade
  • EUR/USD better bid as 1.3550 give way to the upside

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With only UK data on the economic calendar tonight risk currencies were listless in early morning European trade with EUR/USD tracing out a narrow 40 point range as it traded on either side of the 1.3550 level while Aussie slipped below parity on news that Moody was considering a possible downgrade of several Australian and New Zealand banks. Cable meanwhile was hammered by the relatively dovish UK inflation report and the weaker than expected UK labor data both of which tempered market expectations of a rate hike in the near term.

BoE governor Mervyn King noted that the UK central bank sees an equal chance of CPI being above or below the 2% level in 2 years time if current price trends remain in place. The view was more neutral than the market had expected given the high level of current inflation readings which stand at 4%. Mr. King also emphasized that the slack capacity in the economy and generally focused on the sluggish growth and tepid labor demand rather than the spiraling inflation pressures that have been the focus of the currency market.

On the labor front today UK's claimant count numbers provided little support to cable bulls printing at 2.4K versus -3.2K eyed while wage pressures remained muted with average earnings rising only 1.8% versus 2.0% forecast. As we noted earlier, "Lackluster labor data may force the MPC to remain stationary for the time being until growth shows evidence of pick up." Cable reacted accordingly, dropping more than 100 points off the session highs as disappointed bulls bailout out of the pair. With little prospect of an immediate rate hike from the BoE, cable could come under more pressure as the day develops with the key 1.600 level possibly tested in North American trade.

Meanwhile AUD/USD dropped to a low of .9970 in late Asian session trade when Moody's announced that it was putting four of the largest banks in Australia on review for a possible downgrade citing the fact that they had a very high exposure of wholesale funding in off shore markets. The ratings agency noted that, "The review will focus on the Australian banking system's structural sensitivity to conditions in the wholesale funding market." Aussie quickly recovered most of its losses, but the unit remains under pressure trading just below parity and could see more downside pressure now that any rate hike expectations form the RBA have been put on hold for the foreseeable future.

In North America today, the calendar carries a smattering of second tier housing and manufacturing data, but the real focus is likely to be on the FOMC minutes due at 19:00GMT. Currency traders will be looking for any hint of a more hawkish posture from US monetary authorities given the recent uptick in US economic activity. USD/JPY has remained above the 83.50 level but has yet to test the 84.00 figure and may do so if the FOMC minutes indicate that Fed policymakers are considering a move to curtail QE2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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