Euro Drops as Draghi Gives Investors the QE Hints They Wanted

ECB's Draghi Hints at Additional Stimulus in 2015
  • Common currency falls versus all of its major counterparts
  • `Draghi is pulling no punches,' says Credit Agricole's Marinov

The euro tumbled to a two-month low after European Central Bank President Mario Draghi gave a crowd-pleasing performance at his policy address in Malta, leaving investors in little doubt he’s ready to deploy more monetary stimulus to boost the flagging economy.

The shared currency fell versus all of its 16 major counterparts after Draghi said officials will reexamine the scope of their quantitative-easing plan in December. The bond purchases, originally due to end next September, will continue until the ECB sees a sustained increase in the inflation outlook, he told reporters. Policy makers also discussed a further cut to the bank’s negative deposit rate, he said.

The euro’s decline vindicated options traders who had added to wagers for the shared currency to reverse its recent rally against the dollar, and who boosted them even more after Draghi’s remarks.

“Draghi has provided clear confirmation that monetary stimulus will be stepped up in December, and both a stepping-up of QE and a deposit-rate cut are now on the table,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam.

The shared currency dropped as much as 2 percent to $1.1107, the lowest level since Aug. 18, as of 5 p.m. New York time. It slipped 1.4 percent to 134.06 yen. Stimulus tends to weaken a currency by expanding the monetary base.

“Draghi reiterated that downside risks to growth and inflation remain in place and placed emphasis on the December meeting for reassessing the policy stance,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London. “That is a signal that the ECB is likely to ease further if downside risks remain in place by then. That added pressure on the euro.”

Options Premium

The premium for one-month options to sell the euro against the dollar over contracts allowing purchases jumped to 0.89 percentage point after Draghi’s remarks, from 0.70 before he sat down to speak. Both levels were the highest since July, based on closing prices compiled by Bloomberg.

While less dramatic, Thursday’s euro declines saw Draghi repeating his trick of May 8, 2014, when he sent the currency tumbling from a 2 1/2-year high versus the dollar by saying he was ready to ease policy. And the events of the ECB’s last meeting that ended Sept. 3, when he revamped the 1.1 trillion-euro QE plan and sent the single currency to its lowest level in two weeks.

There was little sign of the moves to come before Draghi’s speech, when the euro was down just 0.2 percent against its U.S. counterpart and barely reacted to the ECB holding its main interest rate at 0.05 percent and its deposit rate at minus 0.2 percent, as predicted by economists.

“Draghi is pulling no punches,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London. “This pushed the euro lower, despite the fact that some dovishness was already priced in.”

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