Cable a Safe Haven?

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Top Stories

  • Choppy Friday with lack of liquidity and data today
  • UK Net Borrowing better than forecast
  • Nikkei off -2.51% Europe lower by -2.79%
  • Oil below $80/bbl at $79.44/bbl
  • Gold at $1861/oz.

Overnight Eco

  • JPY All Industry Activity Index (MoM) 2.3%
  • EUR German Producer Prices (YoY) (JUL) 5.8% vs. 5.3%
  • EUR German Producer Prices (MoM) (JUL) 0.7% vs. 0.1%
  • GBP Public Sector Net Borrowing (Pounds) (JUL) -2.0B vs. 0.4B

Event Risk on Tap

  • CAD Consumer Price Index (JUL)
  • CAD Consumer Price Index (MoM) (JUL)
  • CAD Consumer Price Index (YoY) (JUL)
  • CAD Bank Canada Consumer Price Index Core (YoY) (JUL)

Price Action

  • USD/JPY drops to 76.35 as 76.00 comes into view
  • AUD/USD pressured early on risk aversion but recovers above 1.0350
  • GBP/USD remains well bid at 1.6500 with M&A and data supportive
  • EUR/USD retakes 1.4300 after dip earlier

A very choppy end to the week in the FX market with risk currencies generally ignoring the persistent weakness in stocks as rumors and M&A flow dominated trade in early European session. The EUR/USD dipped to 1.4262 on risk aversion selloff but quickly recovered to trade above 1.4325 in good two way trade.

On the economic front German PPI printed much hotter than forecast at 0.7% versus 0.1% eyed. The majority of the gains were driven by the rise in energy costs and ex-energy the gains were only 0.2%. Nevertheless the news suggests that inflationary pressures remain in the system and could keep the ECB from loosening monetary policy despite increasing threats to the European banking system.

Cable remained relatively bid on M&A flows as HP 10 billion dollar takeover of Autonomy was viewed as pound positive. The unit also benefitted from better than expected Public Sector Net Borrowing results which printed at -2.0B versus 0.4B eyed. The net surplus in July may have been due to special factors including a bank levy of 660M GBP and an increase in VAT to 17.5% to 20%. Although the overall trend in PSNB looks favorable for the April-Jun quarter as the UK government has clearly applied some austerity measures to obtain control over the burgeoning fiscal deficit, the series can be very volatile and could degrade quickly if the latest economic data translates into slower growth in H2 of 2011.

Some analysts have made the argument that cable cold be viewed as an alternative safe haven bet as well as a risk trade, given the discipline displayed by UK fiscal authorities. We however remain skeptical that cable can maintain its rally in the face of deteriorating economic fundamentals. UK economy is still highly dependent on the financial sector and the recent turmoil in global capital markets is likely to dampen growth going forward which in turn will worsen UK fiscal finances irrespective of government efforts.

Finally, FX markets were abuzz with rumors that the SNB may institute a tax on foreign deposits over the weekend as an additional measure to weaken the franc. This week the CHF crosses finally stabilized with USD/CHF trading .7800-.8000 and EUR/CHF 112.00-115.00 It appears as though the SNB would like to push the franc to the upper end of those ranges as the absolute maximum value for the currency in order to contain any further damage to the Swiss economy from the rapidly rising franc. Given those policy objectives a tax would be the next natural step although Friday rumors rarely come true.

FX Upcoming

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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