The RBA's comments that output growth is slower than previously anticipated, following Monday's dismal building approval data (-7.8% in February compared with consensus for a 0.5% increase) and Tuesday's more mild disappointment on retail sale (0.2% vs consensus of 0.3), will keep the focus on domestic variables for the policy outlook. As we noted Monday, in the most recent reporting week, the net long AUD futures positions grew because the shorts covered.

Some players appear to be re-establishing short positions and the Australian dollar has scope to test the $1.03 area. A break there could spur another 2 cent decline, especially if the CPI moderates. The market anticipates 80 basis points in cuts over the next 12-months.


Minutes from the recent Federal Open Market Committee meeting will be reported Tuesday. There are many participants who continue to look for QE3, but we do not expect much for them to hang their hats on in these minutes.

Recall, the FOMC statement recognized some improvement in the labor market and also higher energy prices. Given that the Fed's leadership thinks that quantitative easing has been successful, they are not about deny themselves such a tool if needed. However, as Operation Twist enters its final months, it would not be surprising to see more discussions of options, including extending the Twist or sterilizing additional purchases.

The UK construction PMI was significantly stronger-than-expected, though the reaction from sterling has been muted. Gilt yields and the stock market are lower. However, the headline activity index increased to 56.7, a 21-month peak, against expectations of a rise of 53.4 from 54.3 in February.

The forward-looking component, new orders, surged to its best level since mid-2007. Service PMI is released tomorrow and is expected to remain in expansionary territory. The consensus is for 53.4. Better activity should reduce the potential for further QE, which should support sterling against the euro. The dollar should continue to outperform sterling, though. Resistance near the recent high ahead of 1.61. Support near the 200-day MA (1.585).

There will be a lot of news for the Brazilian industrial sector today. February IP is expected to decline almost 6% year over year, reinforcing that the industry has been the hardest hit sector of the Brazilian economy during the recent slowdown.