Euro Traders Signal Weakness to Come as ECB May Add to Stimulus

  • ECB's Praet is latest official to warn on disinflation threats
  • Deutsche Bank says sell shared currency versus peer basket

Traders are betting the euro’s slide to a one-month low is just the beginning.

Options prices show investors are paying the most in two months to protect against further losses by the shared currency after European Central Bank Executive Board member Peter Praet said officials would “certainly do what’s necessary” if its inflation targets were in jeopardy.

“The euro in particular we feel has a lot more room to fall,” Ajay
Rajadhyaksha, head of macro research at Barclays Plc, said in a media presentation at the bank’s office in New York. “We are expecting the ECB to extend quantitative easing by at least another six months, maybe another nine months.”

Praet’s comments reignited speculation that the ECB will extend its stimulus package, just as four Federal Reserve policy makers signaled they’re still looking at raising interest rates this year after standing pat on policy last week. The euro has already slipped about 5 percent from a seven-month high reached Aug. 24 on the prospect of the two monetary policies becoming increasingly divergent.

The euro fell 0.6 percent to $1.1120 as of 5 p.m. New York time, having touched $1.1114, its weakest since Aug. 19. It reached $1.1714 on Aug. 24, its strongest in seven months.

Europe’s single currency weakened 1 percent to 133.60 yen, as a drop in shares and commodities buoyed the traditional haven.

Trade Option

Investors should sell the euro versus a basket of the dollar, sterling and Swedish krona because the ECB is unlikely to tolerate more strength and portfolio outflows indicate weakness, Deutsche Bank AG strategists including George Saravelos and Alan Ruskin wrote in a note.

The ECB’s 1.1 trillion-euro ($1.23 trillion) bond-buying program, which started in March, has had little success in boosting inflation. Gains in euro-zone consumer prices slowed to a near-standstill last month, against the central bank’s goal of just below 2 percent.

Traders have responded by pushing up the cost of options that protect against euro weakness.

The premium they pay for three-month options to sell the euro against the dollar over contracts allowing for purchases widened to 1.2 percentage points, data compiled by Bloomberg show. That’s up from a 2015 low of 0.6 on July 27.

ECB policy makers are “willing to do more if they need to to fight deflation, and I think a weaker euro is definitely part of their quantitative-easing strategy,” said Rebecca Patterson, chief investment officer at New York-based Bessemer Trust Co., which oversees more than $105 billion. “You want to sell into euro strength.”

The ECB’s tone contrasts with that of Atlanta Fed President Dennis Lockhart, who said he remains confident the U.S. will tighten policy this year, even as market volatility threatens the outlook for growth and inflation. Fed futures show 39 percent odds of a Fed rate increase in December and a 48 percent chance of a move in January.

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