USD strength to return, Euro to weaken

Correlations ebb and flow. We’re set to see bullish dollar correlations experienced during Q1 return. That’s strong USD, weak Euro and weak Crude. We’ve already seen volatility in oil collapse and yesterday saw crude close at its lowest level since June 6th. The dollar has found support above the 95.2 level and European data is coming in weaker than expected, led by Germany – who maintains the lionshare of EU GDP (21%).

German business and consumer confidence are contracting, both coming in lower than consensus estimates, labor force productivity has seen two months of declines and consumer spending in Q1 has decelerated from trend.

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Last night’s data shows sluggishness is appearing in the periphery, as well.

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Super Mario has always wanted a weaker Euro. Since the beginning of Q2, the Euro is up more than 7%. This has certainly contributed to the weaker monthly figures above and will surely weigh on Q2 data that has yet to be released.

It is hard to imagine “do whatever it takes” Draghi is willing to take even the slightest chance of EU deceleration. This together with macro data trends leads us to postulate that expanded QE is just around the corner.

With the Fed tightening and the ECB just 6 months into easing, we also expect to see stronger US data lift the dollar higher over the coming months. All of this is bearish news for the Euro and for dollar denominated assets.

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