It Will Be A Massive Week With The ECB On Deck

It will be a shortened trading week with the Labor Day holiday. But the big event this week will be the ECB meeting on Thursday. The ECB chief economist already noted last week that the euro rate absolutely mattered, and if it does matter, then the ECB may look to try to weaken it. A weaker euro is bullish for the dollar and bearish for risk assets and anything linked to inflation. Now, the ECB may not choose to take aggressive action at this meeting, but it is the language or jaw-boning, they choose to use is what will matter most, putting the market on notice.

This may be a crucial meeting, in that context, for the ECB to get out ahead of the Fed and try to turn the tied in what could become a race to devalue currencies. The dollar index has been hanging around the 92 to 92.50 level but has been showing signs of turning with an RSI that is diverging higher. It will take a move above 93.50 to get the dollar into rally mode.

Meanwhile, the market may already be getting ahead of the curve because you can see the rates to borrow overseas dollars are on the rise, with the eurodollar futures appearing to have broken out potentially.

The euro has been challenging the 1.20 level vs. the dollar, but to this point, it has been unable to break out. But a reversal may be on the way, with an RSI that is dropping and diverging from the rising euro. A break below 1.17 in the euro gets it moving lower back to the trend line, and potentially to 1.14.

Not only that, but non-commercial holds on long euro futures have risen to their highest levels ever. It means an unwind would be swift and sudden.

Now a more strong dollar should be positive for European equities, as a weaker euro will make the export economies like Germany more competitive, while also helping to boost inflation and growth for the region. But, at the same time, this a negative for US dollar quoted ADR’s.

If the ECB takes on a more aggressive monetary stance, it is likely to widen the spread between US and European interest rates. The spread between the US and Germany 10-year bonds are ready to surge and break out. If that should happen, we could see the spread rise to around 1.42% from 1.20%, further strengthening the dollar vs. the euro.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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