Expect the unexpected." Heading into Thursday’s London Session, it appeared as though it would be the mildest trading day of the week. Asian markets had quieted following a bounce in the Carry Trade. There was important UK data to come, so it was possible that European traders would take a “wait-and-see” approach. After a light open, our prediction came to fruition as currencies nervously danced in tight spans on moderate volume. Around 0345 EDT (0845 GMT), however, an unexpected rumor out of the United Arab Emirates (U.A.E.) regarding a currency basket peg served as the catalyst to ignite the lethargic market. Further fueled by dismal UK Retail Sales numbers, market movement accelerated as volatility increased. Market players are in the midst of a “flight to safety” resulting in a lower Carry Trade and higher US dollar.

Aside from a noteworthy EURUSD pop above 1.4700 (its highs for the day), all action began when a currency-related story from the U.A.E. hit the news wires. Central bank Governor Sultan Bin Nasser al- Suwaidi commented that the falling US dollar will trigger a “review” of the U.A.E.'s dollar peg. The story did not roil the Greenback, but rather forced traders into a defensive mode. Predictably, the Carry Trade began to fade. EURJPY came off highs near 163.80. Sellers aggressively offered the cross. Eager Carry Trade bears hammered the pair. The move began as a fade and transformed into a slide… then morphed into a free fall. USDJPY collapsed almost 100 pips as weak longs exited positions. The move was swift and nasty, but the market maintained order and lacked the panic often seen with moves of that magnitude.

At 0430 EDT, the second wave of risk aversion swept through the market due to lackluster October UK Retail Sales Data. The monthly result of -0.1% failed to meet the +0.1% consensus. On an annual basis, the +4.4% number fell short of the +4.8% expectation. The British Pound was crushed on the news, though the market needed a few minutes to digest the information. Heading into the event, GBPUSD sat at 2.0520. Within 30 minutes, it had shed a big figure (100 pips). Market participants were rattled again and applied the same trade: sell the Carry and buy US dollars. EURJPY plummeted another big figure to a low around 161.40, a full 170 pips from the New York close. EURUSD was 90 pips from the aforementioned early London high above 1.4700. The London Session has seen yet another attack on the Carry Trade as the resumption of the risk aversion trend that began last week returns to the forefront of the FX market.

The UK story goes beyond today’s trading. In a similar tone as the US, the economic data is showing indications of stagflation. This week is a microcosm of the larger picture: inflation data bettered estimates (PPI and CPI) while consumer-sensitive numbers such as today’s retail sales failed to outperform. Additionally, the Bank of England’s King put forth some cautious comments following the inflation report. Though the British Pound has fallen precipitously the past two days, it remains at relatively lofty levels on a longer-term chart and obviously remains a critical currency to watch.   

Upcoming Economic Data Releases (New York Session)

  • 0830 EDT Canada Sept Manufacturing Shipments MoM, consensus: -0.7% (relevance: low)
  • 0830 EDT Oct US CPI, consensus: +0.3% MoM, +3.5% YoY (relevance: high)
  • 0830 EDT Oct US Core CPI, consensus: +0.2% MoM, +2.2% YoY (relevance: high)
  • 0830 EDT US Initial Jobless Claims, consensus: 320k (relevance: low)
  • 0830 EDT US Continuing Claims, consensus: 2575k (relevance: low)
  • 0830 EDT US Nov Empire Manufacturing, consensus: 19.0 (relevance: medium)
  • 1200 EDT US Philadelphia Fed Index, consensus: 5.0 (relevance: medium)