Transatlantic divergence returns as investors see what they want
Market participants want to believe US growth will start bull market for dollar
Transatlantic divergence is back. After a painful correction, investors were delighted to return to their comfort zone on Tuesday, betting on a stronger dollar. The greenback leapt after two pieces of news: the European Central Bank’s bond purchases will be front-loaded over the next two months, and US housebuilding is doing better.
Rather than explain the move, the news shows how much investors want to believe in the story they have been telling themselves for the past couple of years: that US growth will start a new bull market in the dollar.
The first news item was the belated release of a speech behind closed doors the previous night by Benoît Coeuré, an ECB board member. He said some of the €60bn a month of quantitative easing would be pulled forward to avoid difficulties in the slow summer months.
In itself this should make little difference to the currency and justify a small drop in bond yields. Instead, the yield on the German 10-year Bund immediately dropped 10 basis points, a really big move (it rebounded later in the day).
Investors took the news as far more significant than just a rescheduling. It signalled flexibility on the part of the rule-bound ECB — and the timing, after the biggest Bund sell-off since 1990, suggested that the central bank was offering help to the market. Perhaps, some thought, this was a new “Draghi put”, a promise to help out when volatility gets too high.
Mr Coeuré might have been offering coded support to investors, or might not. But those who had seen their bet on a strong dollar hit serious trouble were happy to believe more money printing was on the way.
Better than expected US housing data could only help but even this is not as good as it first appears. Builders broke ground on more new homes last month than any time since before Lehman failed. Even better, permits for new homes hit a post-crisis high, too. But both are merely making up for a winter slowdown, with the three-month average for permits back to where it stood in December and for new starts still below that.
No matter. Investors worried about the first-quarter US slowdown took the housing data as a sign that the economy was back on track, and it was safe to buy dollars again.