The Queen (Yellen) is Dead

The Queen (Yellen) is Dead

Long Live the King (Draghi).

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The most important central bank in the world is currently NOT the US Federal Reserve Bank and the most important central banker is NOT Janet Yellen. It is the ECB and Mario Draghi, hands down. It’s not even close anymore. 

This week the ECB the Fed released the Beige Book and the ECB had a scheduled interest rate policy meeting. The Fed's Beige Book reported that the U.S. economy expanded at a moderate pace through mid-August, but there were few signs of acceleration in inflation, so almost identical to the last 3-4 Fed Beige Book releases. No surprises and no real market concern, but the ECB meeting was a launching pad for EUR/USD, despite having expressed concern about the level of the Euro.

EUR/USD shot up towards its highs for 2017, trading at levels we haven’t seen since Jan. of 2016. In fairness an interest rate meeting and the release of last months economic report aren’t really on the same level in terms of importance, but the upcoming Fed meeting on Sept. 19-20 is only expected to reveal the official beginning of balance sheet normalization. The announcement of normalization has become such a non-event that Fed Governor Lael Brainard called it “an event that is anticipated to start this year.” and Dallas Fed President Robert Kaplan said the Fed should run down the balance sheet “at the next possible opportunity”. The markets know about it, they know it’s the only thing the Fed will be doing in the near future and they already have it priced in.

The ECB, on the other hand, has some unique volatility coming in its future. Today’s press conference was full of non-reveals and “no comments”. They will begin talking about reducing asset purchases “in the Autumn”. The will leave rates low “for an extended period of time”. They are concerned with the Euro’s appreciation, but they don’t comment on currency levels. Mario Draghi presides over one of the strongest economies in the developed world but yet they still can’t seem to locate much inflation. The strength of the Euro comes from the rise in EU GDP and the fall in the dollar, prompting speculation that the ECB has to halt asset purchases and hike rates or “reduce accommodation” as Draghi puts it. In the ultimate catch 22, the strong Euro depresses inflation. The EU is the major trading partner for 80 different countries, so a strong Euro means imports are cheaper. Lower prices = no inflation = no rate hikes = stronger GDP = stronger Euro = lower prices = no inflation….and on and on. 

Mr. Draghi has a task ahead of him and it's a task that will play out in public. So keep an eye on the ECB and you’ll be watching the moves of the most important central bank in the world and the new leader of the global economy. King Mario Draghi.

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