UK Retail Sales Shows the Price of Brexit

Market Drivers January 18, 2017
USDJPY continues higher 109.50 taken out
UK Retail Sales misses
Nikkei 1.29% Dax 1.06%
Oil $52/bbl
Gold $1285/oz.

Europe and Asia:
UK Retail Sales -0.8% vs. -0.9%

North America:
CAD CPI 8:30

Risk on flows continued to propel USDJPY today with the pair running through the 109.50 level in afternoon Asian trade as bourses both in Asia and Europe rose by more than 1%.

The speculation that US may lift some trade tariffs against China, thus easing tensions in the global trade war, continued to provide a boost to risk, though comm dollars saw very little follow through after pop higher yesterday.

On the eco front, the only data set of note was UK Retail Sales which printed worse than forecast at -0.9% vs. -0.8% eyed. This was the third negative month out of the past four indicating that Brexit uncertainty is starting to seep into consumer spending even as labor demand holds up.

Next month UK eco data could have deeper implications for the Brexit demand if it continues to miss forecasts. A sharp decline in economic performance is likely to put even greater pressure on UK pols to delay the exit and work on a compromise deal or run a second referendum. Cable sold off ahead of the release but held above the 1.2900 figure in mid-morning London trade as investors continued to believe that some sort of deal will be worked out before the March 2019 deadline.

In North America today the calendar is quiet with only CAD CPI on the docket. Markets are looking for 1.7% print as inflation pressure remain muted. With no eco data to drive trade, equity flows will be the key factor in FX dealing as traders will try to assess the probability of a thaw in discussions between the US and China. A breakthrough on that end as well as some sort of a deal on US shutdown would be massively positive catalysts for risk and could spur a huge short covering rally in equities and yen crosses but for now the markets appear to be just tilting that way, though any further escalation of tension could quickly dissipate the goodwill and resume the vicious risk-off selling of last December.