Euro Sinks to World's Worst Performer as ECB Keeps Bears on Edge

ECB Decision Day: Weighing the Impact on Central Banks
  • ECB is forecast to deepen negative rates at Thursday's meeting
  • Kiwi falls to 1-week low after RBNZ cuts rate, signals easing

The euro weakened, cementing its position as the world’s worst-performing major currency over the past month, as traders braced for the European Central Bank’s decision on whether to expand stimulus.

A gauge of volatility in euro-dollar, the world’s most traded currency pair, jumped to a 5 1/2-year high as economists forecast the ECB on Thursday will cut its deposit rate from minus 0.3 percent and step up its 60 billion-euro ($66 billion) monthly bond-buying program.

“We have a small short position going into the meeting as we think if Draghi repeats the December episode, he’d risk undermining his power to influence the market,” said Andreas Koenig, the Dublin-based head of European foreign exchange at Pioneer Investments. “That said, we keep the position small because there is a risk that even if he delivers more, the market impact could be short-lived.”

A short position is a bet the asset’s value will decline.

The euro fell 0.2 percent to $1.0975 at 11:54 a.m. London time. It was little changed at 124.64 yen. Japan’s currency declined 0.2 percent to 113.58 per dollar.

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Price Swings

Traders’ expectations for price swings in the euro over the next week climbed to the highest since May 2010 on a closing basis, reaching 18.5 percent.

“The ECB will probably leave itself room for more asset-buying and deeper cuts into the negative to avoid giving the impression it’s done with the easing,” said Yuji Saito, head of the foreign-exchange department at Credit Agricole SA in Tokyo, who expects a reduction to the deposit rate and the duration of the stimulus plan to be extended. “Markets are likely to respond in straightforward fashion with euro-selling.”

Traders are pricing in a 80 percent chance that the ECB will cut the deposit rate to minus 0.4 percent, and 20 percent odds it’ll be lowered to minus 0.5 percent, according to data compiled by Bloomberg using swaps on the euro overnight index average. That compares with 7 percent odds of a cut to minus 0.5 percent on Wednesday. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.

The risk for euro bears is a repeat of the ECB’s December stimulus extension, which underwhelmed investors and sparked the euro’s biggest one-day increase since 2009.

December Surprise

Europe’s single currency jumped 3.1 percent on Dec. 3 after President Mario Draghi said the ECB would keep the pace of its monthly purchases steady and extend them to at least the end of March 2017. The central bank also broadened the range of assets eligible for purchase and cut the deposit rate by 10 basis points.

The euro has depreciated about 3 percent against the greenback since Feb. 10, yet as speculators have recently added to bets that it will weaken, bearish positions are less than half what they were at the start of the year.

“If its options are in line with market consensus, the euro will be caught in the crossfire of selling and buying,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank Ltd. in New York. “The euro may simply fall if the ECB matches or exceeds market expectations, since speculative short positions aren’t big, unlike in December, when everybody was short.”

Investors are increasingly skeptical about the ability of further measures to significantly weaken the euro. When Bank of Japan Governor Haruhiko Kuroda surprised investors by adopting negative interest rates on Jan. 29, he spurred only a brief drop in the yen, which went on to post its best month since 2008.


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