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Since October 4th low through yesterday's high the S&P 500 has rallied almost 14%. In the same time the euro and US Treasuries have fallen for six consecutive sessions before Thursday. Some popular technical retracement targets of the down late summer down move have been approached and it should not be surprising for the markets to consolidate a bit, especially given the uncertainty over Europe, US earnings season and general anxiety over the economic and political outlook (not just in the US but globally of course).

The economic data does not really alter the macro picture. The UK trade deficit was smaller than expected but the economy remains weak and the data is not really sufficient to shed light on the key issue of more QE when the current GBP75 bln of gilt purchases is completed in Q1 12. Market rumors that Ftich was going to follow Moody's and cut the ratings of some UK banks proved on the money, but elicited only a minor reaction by investors.

Australia reported a somewhat stronger than expected employment report, but the market continues to expect the next move in rates is for the RBA to deliver a rate cut. The Australian dollar has rallied more than 9% since the low on Oct 4. While the $1.000 may offer some psychological support, a proper retracement could see the Aussie head back toward $0.9900.

US trade figures were largely in line with expectations. Although the bilateral data is not seasonally adjusted, the fact that the US deficit with China increased will have little material impact on the House vote on the legislation aimed at compensating American businesses for the under-valued Chinese yuan. The bill will regard a "misaligned" currency as a subsidy for exporters, but this appears to violate international agreements. Rather than trigger a trade war, as many have suggested, the unlikely passage of the bill, will likely see China retaliate through the WTO.

How will the consolidation be resolved? In the bigger picture, I think the dollar's downside correction has another leg to come. The key for the euro is the $1.3840-50 area and a break of it would suggest $1.40. Sterling may lead the way and a break of $1.5780-$1.5800 could signal a move toward $1.60. That said, there is some risk that the consolidation phase lasts longer and becomes an alternative to what I have imagined to be the last leg of the dollar's downside correction.