Draghi Unites Euro Bulls With Bears All Watching $1.35

Photographer: Jasper Juinen/Bloomberg

After European Central Bank President Mario Draghi announced the ECB’s policy easing on June 5, the euro experienced its biggest price swings in more than two months as traders weighed the impact of the measures. Close

After European Central Bank President Mario Draghi announced the ECB’s policy easing on... Read More

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Photographer: Jasper Juinen/Bloomberg

After European Central Bank President Mario Draghi announced the ECB’s policy easing on June 5, the euro experienced its biggest price swings in more than two months as traders weighed the impact of the measures.

The over/under for Mario Draghi, and the euro-zone recovery, is $1.35.

That’s the euro rate that dealers from UBS AG to JPMorgan Chase & Co. see as the dividing line between success and failure for the European Central Bank’s latest attempts to boost growth and avoid deflation.

The currency dipped to $1.3503 on June 5 after the ECB became the first major central bank to take one of its main interest rates negative. The $1.35 level is also just above this year’s low of $1.3477 set in February. A drop below that threshold would presage further losses, strategists say, while a sustained inability to breach it would open the door to a rally.

“$1.35 is very important -- it’s the ECB low, the D-Day low,” Niall O’Connor, a technical analyst at JPMorgan in New York, said by phone on June 12. The U.S. investment bank predicts a drop to $1.30 by year-end, from $1.3533 at 8:41 a.m. in New York. “From a short-term perspective, it’s a question of whether it’s range-bound or a more immediate downside break.”

Draghi and his fellow policy makers at the ECB are counting on a weaker currency to prevent deflation and help exporters. The central bank chief said in May that the strong euro is “a serious concern” at a time of slow consumer-price increases and sluggish growth. Data today showed the inflation rate is stuck at a quarter of the ECB’s 2 percent target.

Trending Market

The $1.35 level is also significant because buy and sell orders may be clustered there, according to Richard Cochinos of Citigroup Inc., the world’s largest foreign-exchange trader.

While $1.35 isn’t “make or break,” it’s “getting a lot of attention,” the bank’s head of Americas Group of 10 currency strategy in New York said by phone on June 13. “It’s a strong level in terms of sentiment, and it’s the low of the ECB day.”

In gambling, the term over/under refers to the expected combined score of a sporting event, with people placing bets wagering the actual score will either be higher or lower than that number.

The 18-nation euro has weakened 0.7 percent in June and 1.5 percent this year, and is down more than 3 percent from a 2 1/2-year high of $1.3993 reached on May 8.

“The key question is whether we’re in a trading range or a trending market,” Marc Chandler, the chief currency strategist at Brown Brothers Harriman & Co. in New York, said in a June 10 phone interview. “$1.35 is the obvious level, that’s the low we saw in the immediate reaction to the ECB. It’d be serious if we fell through there.”

Unprecedented Steps

The ECB took the unprecedented step this month of cutting its deposit rate to below zero, while also lowering the benchmark refinancing rate to a record 0.15 percent to boost growth and consumer-price inflation.

The World Bank said last week it sees the euro region’s economy expanding just 1.1 percent this year, versus 2.8 percent for the world. Today’s inflation report showed a reading for May of 0.5 percent, down from 0.7 percent the prior month.

After Draghi announced the ECB’s policy easing on June 5, the euro experienced its biggest price swings in more than two months as traders weighed the impact of the measures. A gauge of realized volatility on the currency jumped to 5.9 percent on June 11, from 4.02 percent a week earlier. A JPMorgan index of global price swings closed at a record-low 5.76 percent June 6.

Bulls, Bears

While bears say the ECB’s rate cuts will depreciate the currency by making it cheaper to borrow and sell against higher-yielding peers, bulls argue the measures will inject new life into European bonds, attracting international investors. Spain’s 10-year yields fell below those of U.S. Treasuries last week.

“These ultra-low interest rates are going to encourage investors to go in,” Eimear Daly, the head of market analysis at London-based broker Monex Europe Ltd., said in a June 10 phone interview. The euro will rise from near the “psychologically important level” of $1.35 to above $1.40 around the start of next year, she said.

Strategists at ING Groep NV studying trading patterns downgraded their outlook for the euro to “neutral” from “up” because of the currency’s failure to close above a “resistance area” of $1.3560 to $1.3580, Roelof-Jan Van den Akker, a senior analyst at the bank in Amsterdam, said in a client note today.

ING strategists said in May they expect the euro to fall to $1.28 by year-end, compared with the $1.31 median estimate in a Bloomberg survey of more than 60 strategists. Sweden’s SEB AB said in a note today that it expects the currency to break below $1.35 in coming days.

“The lows for the year roughly speaking come in just below $1.35,” Shahab Jalinoos, a Stamford, Connecticut-based senior currency strategist at UBS, Switzerland’s biggest lender, said by phone on June 13. “A break of that low would be meaningful because we’re making new lows for the year.”

To contact the reporters on this story: Andrea Wong in New York at awong268@bloomberg.net; Rachel Evans in New York at revans43@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Robert Burgess, Paul Armstrong

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