Market is exaggerating dovishness of record of ECB's meeting - BBH

"The specific statement that raised the market's hackles was: Concerns were expressed about the possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future," explains Marc Chandler,  Global Head of Currency Strategy at BBH.

Key quotes:

"Our operating assumption is that the ECB's record like other central banks' minutes is not simply a transcript of what was said.  It is a communication tool.  Thought is given to what goes in it.  There are sufficient conditions in the ECB's statement that is still a relatively low level of concern.  The overshooting was not realized it was "possible."  It is not happening now but could "in the future." 

"However, the underlying trend has begun weakening.  In H1 16, the eurozone reported an average monthly surplus of 22.6 bln euros and 19.1 bln euros in H1 17.  This is not to minimize the significance of EMU trade surplus.  Recall that in the H1 07, the period before the beginning of the crisis, the eurozone recorded an average monthly trade deficit of almost 173 mln euros.  The German surplus did not quite offset the deficits of most of the other members.  Now the German surplus is larger, and many former deficit countries are running small surpluses."  

"Even if the euro is not overshooting and will not overshoot anytime soon, there is still importance in the ECB's record.  The sub-text is that the ECB leadership is laying the groundwork for a gradual tapering and exit from the previously thought to be unorthodox policies.  The creditors, including Germany, have long complained that monetary policy is too accommodative.  Draghi and his allies at the ECB are arguing that the backing up of interest rates and the strength of the euro may tighten financial conditions prematurely.  The economic activity and lending still require, they argue, much official assistance."  

"Our argument is that divergence is not only alive, but it has not peaked.  Making some conservative assumptions, the Fed's balance sheet will shrink $180 bln between Oct 2017 and end of June 2017.  The ECB's balance sheet is likely to expand by about 360 bln euros over the same period.  The Fed may hike rates two more times (maybe three) before the ECB raises its negative 40 bp deposit rate.   Where there may be convergence is that Macron's support in France has converged and gone below Trump's support in the US."