Volatility Increases From Currencies to Bonds Before ECBKevin Buckland and Eshe Nelson
Euro volatility surged to the highest in a year and price swings in Treasuries rose to a two-month high as investors speculated on the extent to which the European Central Bank will ease monetary policy today.
While the majority of economists surveyed by Bloomberg News predict the ECB will cut interest rates, leaving its deposit rate below zero, they are more divided on the additional measures it may take and where that will leave the 18-nation currency. Barclays Plc strategists say the shift in central-bank policy makes it time to sell the euro. Axel Merk, president and founder of the Palo Alto, California-based Merk Investments LLC, disagrees, saying the ECB will struggle to push the euro lower. The euro fell to a one-year low versus Poland’s zloty.
“There is a consensus that the ECB will cut rates,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “The market is very split” on extra easing measures, he said. “To have a strong impact on the euro, the ECB would need to deliver a lot.”
Implied volatility on one-day options on the euro-dollar exchange rate surged to as much as 22.1 percent, the most since February 2013, from 4.3 percent at the end of last week. It was at 20.9 percent at 12:36 p.m. London time. For Treasuries, the Bank of America Merrill Lynch MOVE Index, which measures price swings based on options, increased four basis points to 64.9 basis points yesterday, the biggest gain since April 2.
As ECB President Mario Draghi and his colleagues meet today in Frankfurt, investors are scrutinizing how far they will go in their efforts to revive inflation and boost growth. The euro has weakened 2.7 percent since touching a 2 1/2-year high on May 8 before Draghi sent it tumbling by saying that the Governing Council would be “comfortable” to act in June.
The euro was little changed at $1.3605 after falling to $1.3586 on May 29, the weakest level since February. The common currency declined 0.2 percent to 139.43 yen. The yen climbed 0.3 percent to 102.47 per dollar.
Policy makers will cut the deposit rate to minus 0.1 percent, based on the median forecast in a Bloomberg News survey of 50 strategists, meaning the central bank would charge banks to deposit cash. Fifty-eight of 60 economists in a separate survey said the ECB will also reduce its main refinancing rate. The Bank of England today left its monetary policy unchanged, as predicted by economists in a Bloomberg News survey.
Draghi will probably indicate that any interest-rate cut this week won’t be the last, according to two euro-area central-bank officials. The briefing may also be the venue for him to announce non-standard measures aimed at stimulating lending to the real economy, which ECB data shows has been falling for two years and has only in recent months started to show tentative signs of stabilizing.
“No currency has frustrated FX market participants more over the past two years,” than the euro, strategists at Barclays led by Jose Wynne in New York, wrote in an investor note dated yesterday. “Despite a banking crisis, a severe recession and a muted recovery, the euro remained stubbornly strong. The trend of euro downside finally is upon us. This time it’s real.”
The implied volatility for the euro against the dollar on one-month contracts rose to as high as 7.31 percent, a level not seen since Feb. 6, before slipped to 7.09 percent.
Options traders have been betting that the euro will weaken since 2009, based on the 25-delta three-month risk reversal rate. The rate was at a 0.88 percentage-point premium for euro puts, which grant the right to sell the currency, over calls. That’s down from this year’s high of 0.99 percentage point in January, according to closing-market prices, suggesting traders have reduced bets the euro will depreciate.
“Structurally, it’s just very difficult” to weaken the euro, Merk, whose Absolute Return Currency Fund returned 1.6 percent in the past year, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton. “He can raise his finger, he can threaten the market with more action -- well, how much more shall we be surprised? Everybody expects Draghi to do a lot and this is how weak the euro is getting.”
The shared currency may strengthen past $1.50 by year-end, Merk said.
The euro weakened against emerging-market currencies including the Polish zloty, Hungarian forint and Turkish lira.
The euro fell to as low as 4.1068 zloty, the least since April 2013. Against Hungary’s currency it dropped 0.3 percent to 304.08 and it traded 0.2 percent lower at 2.8719 lira.
“The day could be better for emerging-market currencies and bonds than for the euro-dollar bears,” Kit Juckes, global strategist at Societe Generale SA in London, wrote in an e-mailed note today. “Although the focus is on euro-dollar, the main market effect of the ECB action, if they announce measures in line with our expectations, will be on wider risk sentiment. We favor euro shorts versus zloty, lira, sterling, and Norwegian krone.”
Price swings also increased before the monthly U.S. employment report tomorrow. The Labor Department will say U.S. employers added 215,000 workers in May, versus 288,000 in April, based on a separate Bloomberg survey.
The dollar weakened against all of its 16 major counterparts as U.S. Treasury 10-year yields fell two basis points, or 0.02 percentage point, to 2.59 percent.
(An earlier version of this story was corrected because the survey of economists referred to the deposit rate not the main refinancing rate.)