Wednesday, June 13, 2018

Today's Log Entry: The Dollar vs The Euro

Currencies have my attention this week; particularly the U.S. dollar and the Euro.

The U.S. Fed has been locked in a two-day policy meeting that ends today with an 11am pt statement. Odds are virtually 100% (well, 84% looking at futures action) that they'll up the fed funds rate by .25%; that's for sure baked into the cake. 

Now, the tone of the announcement is a different matter altogether. The markets will be looking for hints as to the pace of future rate hikes, the normalizing of the balance sheet (all the stuff they bought while bailing out the system during the last recession), and their general view of the state of the economy and inflation going forward. 

The European Central Bank (ECB) is meeting this week as well, with their post-meeting announcement coming tomorrow. For the ECB it's all about the language, as futures are pricing in a mere 5% chance of a rate hike (I promise, there won't be one tomorrow). Members have hinted strongly over the past few months that the fall of this year will see the end of their quantitative easing (still adding to their balance sheet) program.

Here's where the currency volatility comes in:

If you take the latest signals from both central banks you wouldn't expect much by way of currency moves one way or the other. However, if you consider the signals from each economy respectively, and you assume the respective central banks' members will as well, we could see the week close on a pretty strong rally in the dollar against the euro. Reason being, our analysis suggests that while the U.S. economy is presently accelerating, the Euro Zone economy continues to slow (in terms of growth rate), which could have the Fed sending a more hawkish signal than is presently priced in, with the ECB's language leaning more dovish than their latest commentary might suggest. 

Citigroup's Economic Surprise Indices (economic results relative to economists' expectations) confirm our analysis (above zero = better than expected, and vice versa):   click to enlarge...

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