Musings on a correction

The ducks have all been lined up for a correction in those markets most impacted by hopes of Trumpflation, namely the dollar and fixed income.  The euro went down ten days in a row.   There's a US holiday approaching which will see large swathes of the market out of the office for three days.  And, as of yesterday afternoon New York time, there was even a large earthquake just off the coast from Fukushima, site of the devastating earthquake/tsunami that changed the face of Japan's energy policy and external balance, ultimately sowing the seeds of Abenomics.

If we look back at the earthquake in 2011, which happened early on a Friday morning US time, while the initial reaction was modest there was considerable follow through once the extent of the damage to the nuclear power facility became known.  Indeed, in the several trading days following the earthquake, USD/JPY dropped some 8%.

As such, the relatively muted reaction observed thus far (at the time of writing) has been telling.  Just two weeks ago we had an example of history providing an excellent road map for a political outcome; one might have thought that the market may have been more inclined to follow the historical precedent of Japanese earthquakes- not only the 2011 disaster, but the 1995 Kobe 'quake, which saw USD/JPY drop like a stone afterwards.

That the market has chosen not to take USD/JPY behind the woodshed speaks to the level of conviction on the dollar trade, the level of positioning (or lack thereof, relative to conviction), or both.  Either way, the paltry correction in the dollar despite an ample rationale for one and ostensibly overbought momentum suggests that the buck has further to go.   Certainly from a fundamental perspective, Macro Man would be more inclined to fade equities than the buck at this juncture, though it may well be the case that positioning will also support stocks for a while longer if survey evidence is to be believed.  Moreover, as Spooz have surged to their highs credit has not quite followed suit.   Mere coincidence, noise, or an incipient sign that the issue-to-buy-back craze may have peaked?

Then again, we should always be wary of the good Dr. Pavlov when he rings the bell.   US 5 year yields at at level where they've stopped on a dime for the last 2-3 years.  While a breakthrough would provide another important brick in the wall of evidence that something has fundamentally changed, common sense would suggest this as a likely place for shorts to take profit.

If they don't, then strap in because the rest of the year will be a fun ride.