Dovish Draghi Doubles Down – Is policy divergence finally here?

downloadDraghi doubled down dovishly last week. Key quotes among his presser included:

(1) Draghi: “To show that the ECB is going to stay in the markets, to show that it will continue to exert pressure on market prices, though we don’t want to distort them, of course.” Well, pretty sure they’re absolutely trying to distort prices, but anyway…

(2) Question: “Does this mean that not one member of the Council expressed his opinion as being in favour of tapering?”
Draghi: “Exactly.”

(3) Draghi: “Second, there is no question about tapering. Tapering has not been discussed today.”

(4) Draghi: “I’ll tell you what happened today: it [tapering] was not discussed.”

(5) Draghi: “the key message is to show that there is no tapering in sight.”

That said, tapering was 100%, absolutely discussed. However, the governing council’s conversation centered on how best to articulate that it wasn’t. Whether or not €60b vs €80b is a setup for a future taper, Draghi’s generally unqualified replies – especially, against the backdrop of a Fed poised to hike next week, leave little room for misinterpretation. The ECB is absolutely still in easing mode.

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One year ago, markets sat in a very similar environment. The Fed had conditioned markets for a late December hike and consensus set the stage for Draghi to ease at his early December meeting. The advent of what was coined “policy divergence” (ECB easing coupled with Fed tightening) lit a fire under the dollar, sending it to test all-time highs. Unfortunately – for dollar bulls, Draghi balked and amongst other things – the FT accidentally released fake ECB news minutes before the ECB rate decisions were to hit the wires, (don’t get me started on the concept of “fake news” – if you actually blindly believe what you read on the internet, fake news is really the least of your issues) markets responded with the Euro leaping 4% and the dollar dumping 3% on the day and continued weakness for the next five months.

The past month of dollar strength ought to be attributed only to Trump and the Fed, given that markets were expecting an ECB taper. However, with the ECB firmly in easing mode and Fed Futures pricing a December hike at 94%, we’re closer than ever to experiencing actual policy divergence. That means, the dollar has a lot of ground to make up for. With price action continuing to accelerate and RSI still not warning overbought, resistance at 102 ain’t gonna be a thang! Right now, the biggest risk for dollar bulls is Trump moderating himself even more than he already has.

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