ECB's Expectations Gap

A handful of Fed speakers today underscored market pricing for a high probability of a December hike but the ECB plan remains murky. The Canadian dollar was the top performer while the yen lagged. The Asia-Pacific calendar is light. The latest Premium video below focuses on key dynamics shaping USDX, gold & EURUSD, highlighting the high-probability turning points ahead. 

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A poll from Reuters caught our attention today. They surveyed 17 traders and found that 11 of them don't believe Draghi will add any stimulus this year or next. That's in stark contrast to economists who almost universally believe more QE and/or lower rates are coming.

In sum, there is a roughly 1 trillion euro gap in expectations about how many bonds the ECB plans to buy. To us, that could represent a tremendous skew in market outcomes. If that isn't fully priced in and the ECB continues to buy, it's only likely to keep sovereign yields pinned at or slightly lower than current levels. There truly is a limit to how low you can go.

On the flipside, if 1 trillion euros of buying is priced in and the ECB doesn't deliver, yields could rise significantly and the euro along with it.

At the moment, however, euro longs are a no-go zone. Technically, EUR/USD broke down last week to the lowest since March. The time to make a decision will be closer to the December ECB but in the meantime, we will be watching for hints like Nowotny on Monday who said that one of the lessons from the crisis is that liquidity matters. He also refrained from making any dovish comments, which itself may be a signal.

The opposite central bank seems to be the Fed. There is a 71% chance of a December cut priced into Fed fund futures and that's a clear and transparent (and agreeable) number.

On Monday, the Markit PMI beat expectations at 53.2 vs 51.5 expected and that gave the US dollar and those Fed numbers a bump.

The Asia-Pacific calendar is very light in the hours ahead.