ECB Minutes Analysis, October 6, 2017

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There were no real surprises in the minutes of the September ECB meeting, but nonetheless the minutes caused a modestly decline in the euro, which fell 0.4% following their release.

The reason for the decline was the discussion of euro strength, and the risk it poses to the EU economy. Remember, one of the reasons the euro accelerated so much in August was because ECB President Draghi refused to take multiple opportunities to comment on euro strength, and the market took those omissions as tacit endorsements of the stronger euro.

But, yesterday’s minutes told us the ECB has indeed noticed the 12% rise in the euro vs. the dollar, and if the euro stays strong it may impact its upcoming tapering decision, due on Oct. 26.

To be clear, the stronger euro won’t delay that tapering decision, but it could make the reduction in QE more gradual. And that matters, because with the euro at 1.17 vs. the dollar, a very gradual tapering is not priced in, and that represents downside risk in the euro—perhaps into the low 1.10- 1.15 range depending on taper details.

That also matters for US stocks, because if the euro falls, the dollar will rise, and a stronger dollar will, at some point, become a headwind on stocks if we don’t see continued acceleration in inflation or economic data.

Bottom line, the ECB meeting is a real risk to our “Virtuous Reflation,” because if they are dovish and cause a dollar rally, that may indeed hit stocks. That’s not necessarily a problem until later in the month, but I do want everyone to be aware of it.

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