Has Cable Been Punished Enough?
Ashraf Laidi | Jun 29, 2018 08:15AM ET
On the final day of week, month, quarter and half year, equity indices are starting to pare their earlier gains after a report on Trump considering pulling the US out of the World Trade Organisation. EUR/USD rallies on flash CPI hitting the ECB's 2.0% goal (despite core remaining at 1.0%). On the day, euro leads all major currencies higher against USD, with the yen the only loser vs the greenback. The week wraps up with the US PCE report. US May core PCE price index and Canada's April GDP are due out at 8:30 ET (13:30 London). A new note updating the USD/JPY Premium trade will be issued and sent after the core PCE data.
Cable Bottom?
Comments from the BOE's Andy Haldane on Thursday underscored how the tables have been turned in cable; but have they finally turned enough? The Canadian dollar was the top performer on the day and the strongest on the week as markets wised up to Poloz's comments. In mid-April cable had just touched the highest since Brexit as the market was readying for a May interest rate hike. It was trading just shy of 1.44 then Carney hinted at some soft spots in the economy in an interview with the BBC. The weakness was real as a series of economic data points missed expectations and the pound crumbled down to 1.3050.
Shortly after it hit that low, which was the worst level since November, BOE chief economist Haldane said they would have hiked in May if not for the poor data but that the overall stance was unchanged. He emphasized minimal slack in the economy.
In his view at least, nothing has really changed. If the data begins to turn then it will be right back to Plan A. So is the more than 1300 pip decline in the pair justified? Certainly there have been some Brexit setbacks to compound it but nothing particularly damaging. The US dollar is also higher across the board since the slide began but that accounts for only half the decline in cable.
There's an argument that this is enough and with cable now testing support at the lows near 1.3000 from Q4 last year and the 2016 trendline support (see chart above), we will be watching very closely for signs of a bottom in the near-term. Certainly, there haven't been any yet with the pair in a non-stop slide but it's a theme worth watching.
The US dollar side also merits close scrutiny. Fed centrist Bostic talked about slowing the pace of hikes on Thursday and that could be something we hear more about. Much will depend on today's May PCE report. Core inflation is expected to tick up to 1.9% from 1.8% and headline to 2.2% from 2.0% but we're nearing the apex of the one-off factors that are boosting prices. Keep a close eye on personal income and spending as well, both expected up 0.4%.
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