Is the ECB targeting the euro to keep in on the right (downward) path?

Outlook:

We confess we were willing to consider that the euro’s corrective up move yesterday gained some credibility in part because of the press reports indicating that over the past twenty years, we had two big occasions when the dollar fell after the Fed raised rates. We can dismiss these comparisons as not relevant because so many conditions have changed, including the introduction of the euro and German reunification, but the idea lingers poisonously.

We can add that in the wake of past terrorist events, the euro mysteriously rallied, plus the long-standing bias favoring the magic Teflon euro. Besides, there’s always “buy on the rumor, sell on the news,” which this time implies the Fed rate hike is fully priced in. Funny, the ECB’s new doses of dovishness are not priced in.

Today we have a slew of fresh data, including Oct durables, consumer spending, U Michigan consumer sentiment and single family home sales. After a flurry of activity this morning, things should die down as the US goes into holiday mode. But e are going to get a doozy of a test on what is priced in and what is not next week when the ECB meets on Thursday and the US reports the last payrolls before the Fed policy meeting. OPEC meets, too, although no one is expecting a policy change.

The big news is the ECB pondering a 2-tier deposit rate that “punishes” big banks (meaning France and Germany). This is not actually fresh news and evidently has been around for a while. What caused un-named ECB officials to offer Reuters a scoop? You have to wonder if the ECB was not watching the rising euro with alarm and deciding to throw a little cold water on it. We already expect the amount of the monthly purchases to be increased and the ending date pushed out beyond next Sept, so that leaves the discount rate as the chief source of re-invigorating sentiment. Eurozone bank lending contracted, then expanded a little, then contracted back to nearly zero again. There’s nothing like a punitive deposit rate to get the banks out sweeping the sidewalks for somebody to lend to.

Is the ECB targeting the euro and releasing nuggets of policy issues to keep in on the right (downward) path? We don’t know and nobody else does, either, but it’s not a silly idea. Managing the euro lower carries a lot more credibility than the Fed trying to manage the dollar. At least the Fed denies it tries to manage the dollar. The ECB doesn’t deny.

We still think US players should go square into the long weekend but if you can’t resist a flyer, be short euros. Mr. Draghi isn’t through with us and consider that he has yet to disappoint.

Note to Readers: Thursday is a national holiday in the US. Banks are closed. We will not publish any reports.