transatlantic divergence may
sound like a steamship from the Roaring
Twenties but it's been the trade of the
year as the euros tumbled against the
dollar many are now poised for it to be
the trade of next year as well thanks to
the central bank's of Europe and the US
but they should be cautious on Thursday
the dovish European Central Bank is
indeed poised to move rates even more
deeply negative to extend quantitative
easing beyond next September to buy more
bonds or possibly to do all three in a
fortnight's time the US Federal
Reserve's widely expects to take the
exact opposite approach raising interest
rates for the first time in almost a
decade it's living divergence the
conclusions obvious by the dollar and
sell the euro the u.s. is tightening and
the eurozone easing what else could you
do well this chart shows the value of
the euro that's the blue line there
against the dollar and against that in
red is the additional yield that you
earn from holding German rather than us
short-dated bonds even as German yields
followed European monetary policy into
more negative territory us yields have
been rising in anticipation of fared
action that's driven down the spread
there in too deep into deeply negative
territory that's over on the Left axis
there German bond yields are now almost
two percentage points lower than in the
US the two-year level well so far so
obvious but everyone knows this as short
of you pointed out yesterday bet on the
dollar rising could still get a bit more
crowded so perhaps there is a bit more
to go after all the euros only just
coming close to the levels that it hit
back in March the problem is with the
fundamentals monetary policy in the
eurozone seems to be working there are
still threats of course with Ukraine in
the Middle East on Europe's doorstep and
domestic political dangers never far
away in the troubled eurozone but look
at the economic data and the region does
look like it's improving fast today
brought European manufacturing figures
showing the fastest great since last
summer banks are again lending to
companies and individuals and
employments dropped to the lowest since
early 2012 monetary base is growing just
as fast as it did from the euros
launched back in 1999 up to the start of
the crisis year of 2007 and if you look
at core inflation stripping out the
volatile energy and food prices its back
above 1% still below the two percent
close to two percent target but well
away from the deflationary threat the
same time GDP is rising faster than the
sclerotic eurozone can expect in the
longer term now all of that suggests and
after this week's easing by the ECB the
talk in the eurozone might soon turn
hawkish the same time the US recovery
starting to look a bit more challenged
today's manufacturing data in the US
that's the blue line there is showing
the sector contracting at the fastest
pace since 2009 should say below 50
shows that Manufacturing's contracting
and above 50 shows growth this red line
is the eurozone it does look as though
the strength of the dollars starting to
hurt the internationally exposed
American manufacturers the same time as
the weak euro is starting to help the
European manufacturers domestically
driven us services sector still looks ok
but higher US inflation compared to
Europe can all be explained in the core
level by the faster rise in u.s. rents
just hardly the basic building block for
a robust economy and none of this means
that the dollars about to crash but
after rising a third since last summer
sorry since summer last year against the
euro an investor would need to think
that the European recovery is weaker
than the data suggests while the u.s. is
stronger in order to bet on the dollar
having another big gain in 2016