Macro Weekly – The US-eurozone divergence

by: Han de Jong , Nick Kounis , Maritza Cabezas , Georgette Boele , Roy Teo

Macro Weekly - 25 August 2014 - The US-eurozone divergence.pdf ()
  • Big Picture: The economy of the eurozone continues to disappoint, while the US economy is starting to fire on all cylinders. Historically, the direction of the business cycle in the US and in the eurozone has been highly correlated, apart from a couple of instances where the eurozone was subject to large asymmetric shocks. We do not think that this is the case this time and the divergence is unlikely to last. We expect eurozone indicators to get better before too long, possibly helped along by ECB policy action.
  • Rates: ECB President Draghi’s comments at Jackson Hole suggested that additional monetary stimulus has become more likely. We expect the central bank to start an ABS purchase programme soon. The chances of a broader QE scheme have increased. Meanwhile, the contrast with his US counterpart’s speech was stark. Fed Chair Janet Yellen made a slight shift in her usual dovish tone to a more balanced one. This suggests that the Fed could raise rates earlier than it is currently signalling, though a rate hike is still some way off.
  • FX: Monetary policy divergence has been the key theme in currency markets over recent days. The US dollar rallied to the highest level since September 2013 on expectations that the Fed may increase interest rates earlier than previously expected. This shift was fuelled by Fed commentary as well as strong US economic data. At the same time, the euro weakened on the back of expectations of more ECB monetary stimulus. We think that dollar strength has further to go against both the euro and the yen.