Where else can we put out faith if not in the ECB?

Outlook:

The outlook for the euro depends almost entirely on the bank assessment due Sunday. The FT writes that some analysts think there will be more than a handful of fails and this would actually be a good thing, because suspicion is running high that the banking sector has deep and wide problems. Naming only a handful of failures would undermine confidence in the ECB, which needs it, badly. One issue that will confuse things is that the tests are based on data from 2013 and banks can (and will) claim that they already fixed those issues. The rest of us will not be able to judge if those claims are true. If there is consensus of a “harmless” outcome and then we get failures in the double digits (from about 11 now expected of 130), a crisis would blow up.

We’re going to make a crazy forecast—the euro will rally on Sunday night after the bank review comes out no matter what it says. This would be due to the deep desire of market players in all markets to be-lieve in the ECB and Mr. Draghi. Where else can we put out faith if not in the ECB? The BoE and the Fed are waffling about everything—should we have forward guidance or not? What should it say? What is the trade-off between unemployment/low wage growth and inflation, anyway? While the UK and US obsess about dumb things like “considerable period,” the ECB is out there boldly buying covered bonds without Bundesbank approval. This is gutsy. The BoE and Fed are wimpy. It’s that simple. In the battle of central bank machismo, Draghi wins hands down.

As for the economies, a great deal of the talk is bunk. We are delighted to see Stephen Jen in the FT agreeing with us that “It’s not persuasive that the US economy is tanking. The dollar is still a very clear trade: it is a play on economic divergence. What’s happening in Europe is real. What’s happening in the US is not real: the fear is not justified and the Fed is confusing matters.” Another analyst points out that any US company (IBM) complaining about the dollar wrecking its earnings is an idiot and deserves to get sold. If you don’t like FX risk, either hedge it away or stay out of the kitchen. Bravo.

We await the ECB’s bank review and the Fed next week. We need clarity and we need it from central bank leaders. But as noted above, Draghi is the obvious front-runner in the clarity sweepstakes. The dollar “should” remain on the upswing—if the Fed doesn’t shoot it in the foot.