Dollar Heavier as Position Squaring Dominates

After rallying in Europe yesterday, as weekend developments encouraged risk appetites, the euro and sterling retreated in North America.  That pullback went about as deep as possible without negating my expectation of corrective forces at the start of the week.  Despite more poor rating news and talk, those corrective forces remain intact today.  

That said North American operators appear more skeptical or more euro negative/dollar bullish than Europe, judging from the recent price action.  Short-term technical indicators also once again suggest North American dealers will open their books with the short-term market over-stretched.    

The much anticipated Italian bond auction saw respectable demand and the upper end of the 5.5-8.0 bln euros were raised and the euro rested the lower end of a band of resistance that runs from around $1.3440 to $1.3480.   

Better mortgage data from the the UK helped sterling keep up and do better than the euro.  There was also talk of month-end flows that some linked to MSCI semi-annual re-jig.  Cable is trading near 5-day highs.  Initial resistance is seen in the $1.5680-$1.5700 area.  Details of the Autumn Statement appear to have largely been leaked, suggesting minimal market impact is likely. 

Rating agencies have been busy, but still unable to shake off the impression that they are laggards.  Fitch affirmed the US AAA, but put it on negative watch.  It raised Australia to AAA from AA+.  A French press report warned that S&P could put France on negative credit watch within a couple of weeks.  Moody's warned that all 27 EU countries are at risk from the euro zone debt crisis.  Moody's also placed subordinated debt, junior debt and tier 3 capital of 87 banks in 15 European countries on negative watch.   The market impact seemed marginal at best. 

There was some unadulterated good news today in the form of Sweden's Q3 GDP.  It blew away expectations of a 0.3% quarter-over-quarter increase with a 1.6% showing.  This  puts the year-over-year rate at 4.6% from a revised lower 4.7% in Q2, and contrasts favorable with consensus forecasts of 3.9%.  

The implication is that the speculation of a Riksbank rate cut next month may be premature and generally points to SEK outperformance near-term, but ultimately the krona, which was the weakest currency last week, is driven, as many other currencies, by the broader global macro picture. 

Japan reported unexpected strength in Oct retail sales (1.4% vs expectations 0.6%), but also an unexpected jump in unemployment (4.5% from 4.1%).  Yet despite the rise in retail sales, the overall household spending (like US PCE) is still 0.4% lower year-over-year (retail sales 1.9% year-over-year).  Tomorrow Japan reports Oct industrial production figures.  A 1.1% bounce is expected after the outsized 3.3% decline in Sept.  The risk may be on the downside due to the Thai floods. 

The dollar has given up the lion's share of yesterday's gain in the yen which had brought it above the JPY78 level for the first time since Nov 8.  Initial support is seen just near JPY77.40.