Cable Crumbles on Carney Comments

Market Drivers June 20, 2017
Carney no rate hikes
High yielders lead
Nikkei 0.81% Dax 0.35%
Oil$45/bbl
Gold$1248/oz.

Europe and Asia:
AUD RBA Minutes
EUR GE PPI -0.2% vs. -0.1%
EUR CA 22B vs. 31B

North America:
USD Current Account 8:30
CAD Wholesale Sales 8:30

It’s been a relatively sedate night of trade in the FX market so far with only cable showing any significant movement after Governor Carney rules out the possibility of any rate hike in the foreseeable future.

Speaking at the Mansion House, Mr. Carney stated that, “From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment.

In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”

Mr. Carney’s words instantly sent pound through the 1.2700 figure, but the pair found some support at 1.2675 and remained there for most of mid-morning London trade. Cable remains under heavy pressure as the prospect of contentious Brexit talks and weakening UK economy weigh on the unit, but ironically enough the worse the UK economy becomes the better the prospects for the currency.

As UK economic conditions worsen, PM May will inevitably have to opt for a “softer” Brexit option with some major compromises on freedom of movement. If the Brexit talks could secure an open trading relationship with EU, UK business sentiment is sure to improve and cable will likely rally as a result. Of course, Ms. May political instincts have been nothing less than horrid and she may simply continue to press for a hard Brexit option in which case cable will fall through the key 1.2500 support. For now, 1.2500 remains the Maginot line between bulls and bears and cable continues to maintain its bullish bias.

Elsewhere, the high yielders traded better in late Asian trade with both Kiwi and Aussie rising steadily as US rates once again slipped. The US 10 year is struggling to hold the 2.20% barrier and until it can do so consistently, the dollar rally will struggle. Yesterday, Fed’s Evans stated that while another rate hike is likely, it will be delayed until December, which is already factored into the current exchange rates. The danger for dollar bulls is that US economy falls to improve (most notably inflation does not rise) in which case the market may discount no further rate hikes this year which would weaken the dollar even more.