Respect the Price Action, Better Opportunity to Resist New Week

Market participants have little reason to fight the corrective pressures that emerged yesterday. The proximity of the weekend and new incentives next week, with among things the FOMC meeting, the BOE minutes and UK budget, the beginning of a new BOJ regime and euro area flash PMIs. 

As is often the case, the correction was triggered by fundamental developments in technically stretched market. In other market conditions, we suspect the same news would not have prompted such price action. We are skeptical the strongest jobs growth in 13 years in Australia and that the Financial Times story yesterday about Qatar's interest to invest GBP10 bln in sterling in some unspecified time is truly driving sterling.

BOE Governor King, who wanted to resume the gilt purchases program, but was stopped by his own MPC, now sounds downright optimistic about the UK's economic outlook, would under other conditions been shrugged off as unfounded optimism.  We will learn next week whether King persisted in desire to resume QE.  Meanwhile, King asserted that if one takes away construction and North Sea production from the GDP calculations, the UK economy would have expanded.  It arguably was an interesting observation when we made a couple months ago, and even then it was made to illustrate the broad stagnation of the UK economy rather than the triple dip that had caught the imagination of the commentariat class, but now it stretches credibility 

The idea that the MPC was not looking to push sterling lower is a bit of hair splitting as the public record clearly shows the MPC had previously complained about sterling strength and has welcomed it weakness.  In any event, the next target for the short squeeze in sterling is $1.5200-20. Note that if sterling finishes the North American session today above $1.5120, it would close above its 20-day moving average for the first time since January 2. 

The euro has remained above the $1.30 level for the first time since March 5 and only the second time this month.  The next corrective target is in the $1.3100-30 area. The news stream is light.  There are two main talking points today.  

First, the EU Summit appears to be giving move space for public investment and this would seem to favor Italy and France, though it is not clear the EC will over rule the objection of some of the creditors, including Germany, to granting France another year to reach the 3% deficit/GDP target.  However, the EU movement seems to be a constructive development and one in which investors appear to have taken in stride and not punished the euro or the European sovereign bond market for what appears to be easing of the austerity drive.  

Second, the Italian parliament meets formally for the first time today to begin the laborious process of putting together the next government.  Besides the obvious difficulty given the 5-Star Movements posture of putting together a working majority in the Senate, the problem is this:  in order to set new elections, a new president has to be in place, but a new president cannot be selected unless a new parliament is in place. 

The Japanese yen has barely budget this week.  The dollar has traded in a JPY95.45-JPY96.71 range over the course of the week and has been in a narrow 40 tick range today.  Earlier the upper house approved the new BOJ management team.  The previous regime steps down on March 20.  Japanese markets are closed on March 21 for the spring equinox.  There has been some talk that Kuroda will call an emergency meeting as early as March 22 to announce a more aggressive asset purchase plan.. 

The North American session sees a slew of US data which include CPI, industrial production, Empire survey and Univ of Michigan consumer confidence.  The dollar's ability to rally on strong economic data is being put to the test.  New cyclical (5-year) lows in weekly initial jobless claim failed to prevent the downside reversal to the greenback.  We do not expect whatever strength is reported in today's report will do much to stop the correction.