Over the next weeks and months, sterling is still a short

Outlook:

It’s of minor interest that EcoFin will talk about asset-backed securities at a meeting today, and yesterday Draghi expressed support for targeted lending and deficit infrastructure spending by anyone who can afford it. These are shooting noises with no gun behind them. Ef-forts so feeble they can hardly be named “efforts” should be euro-negative. We feel the same way about Japanese promises to boost QE if data fails to recover. We have been hearing some version of this prom-ise since 1997.

What is interesting is the pound. Traders reveal their cockamamie psychology by shorting the pants off the pound while at the same time believing the referendum will deliver a No vote. It’s not really a form of hypocrisy, but rather a bet that they can get a bandwagon rolling. And they did, presumably making some juicy gains. Now what? We may get some gyrations ahead of the vote next Thursday, but the main action is over. Expectations of a giant rally on a No vote are not symmetrical—the pound will spike up-ward, of course, but not likely to restore all of the loss. After all, the pound started falling after the high-est high on July 15 at 1.7191. If we draw a linreg channel from that point to the crash date and then ex-tend it out, the highest we can expect next week is 1.6376. Any level over that on an excess of happiness over a No vote would draw in the shorts again. Bottom line, over the next weeks and months, sterling is still a short. You may want to fade the trend to take advantage of the No bounce, but it’s unwise to go long for long.

The other interesting data today—after the IEA’s cut in estimates for global oil demand—is US retail sales, expected to have recovered from a slump. The headline number is 0.6%, or 0.3% ex-autos (Market News). We also get the University of Michigan sentiment index. In a long chain of deductions, good consumer sentiment as proved by retail sales has to influence the already-hawkish leaning Fed, which meets next week. Obsessive types wonder if the language will change, “considerable period” giving way to something else. The Fed doesn’t want to set off another taper tantrum, of course, so what can the statement include that shows a drift toward hawkishness without scaring the horses? One problem, according to Market News, is that the bong gang is complacent and not expecting a change in the “considerable period” language, except along the edges. So, the folks that think the First Hike may be brought forward to end-March from end-June are standing on tiptoes.

The world seeks yield and yield follows growth. The only free country with growth these days is the US. Even some emerging markets like Brazil are foundering. If we think the 10-year has bottomed and 2.50% is the new floor, the dollar gains support. We are deeply suspicious of the dollar/yen chart, but over the years, the chart has looked like this before. It’s abnormal but not unprecedented. Barring some big and unhappy surprise, the dollar rally looks okay, and should resume against the euro, too.