ECB Needs Fed to Weaken Euro as SocGen Sees Policy Impotence

  • `Central banks don’t have much ammunition left,' Juckes says
  • Yen bulls remain among options traders after Kuroda surprise

Mario Draghi will need to rely on his U.S. counterpart to weaken the euro past the 12-year low reached last March as central banks face limits on the impact of additional monetary stimulus, according to Societe Generale SA.

Analysts expect the euro to fall about 4 percent to $1.05 by year-end, according to the median estimate in a Bloomberg survey, after the European Central Bank president indicated last month policy makers may expand unprecedented easing in March. Even after Bank of Japan Governor Haruhiko Kuroda unexpectedly announced negative interest rates on Jan 29, the yen remains the only major currency options traders see strengthening over the next three months.

“I don’t think there’s anything the ECB can do to get euro-dollar down to parity,” Kit Juckes, a London-based global strategist at Societe Generale, said in an interview in Singapore. “Central banks don’t have much ammunition left. They’re pretty close to being impotent in terms of what they can do.”

The good news for Draghi is that Federal Reserve Chair Janet Yellen will probably boost rates three times this year, and that will drive the euro down to parity, said Juckes. 

Societe Generale predicted a year ago that the common currency would fall to $1.10 at the end of 2015. The euro closed at $1.0862 on Dec. 31 and has climbed 0.4 percent since then to $1.0907 as of 7:09 a.m. in London Tuesday.

December Disappointment

Europe’s shared currency surged the most since 2009 against the greenback on Dec. 3 after additional stimulus measures announced by Draghi underwhelmed market expectations. The ECB extended its quantitative-easing program through March 2017 and lowered the deposit rate by 10 basis points, or 0.1 percentage point, to minus 0.3 percent.

Hedge funds also weren’t persuaded after Draghi said Jan. 21 officials will review their programs at the next policy session in March and there are “no limits” on how far they’re willing to deploy measures within their mandate.

Large speculators including hedge funds reduced net futures positions that would profit from declines in the euro versus the dollar to 127,215 contracts as of Jan. 26, from 137,015 a week earlier, according to Commodity Futures Trading Commission data. In early December, bearish bets on the euro were the strongest since May.

Westpac Banking Corp. says that the weakening of belief in Draghi may allow him to shock markets again by reversing previous disappointments.

“Having disappointed many with its moves in December, positioning should not be so heavily short euro as investors remain wary,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac. “This provides Draghi with the opportunity to regain his mantle as the over-deliverer, say by boosting the monthly QE total considerably.”

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