Money Markets Primed for Draghi as Bets Jump on Deposit-Rate Cut

  • After Draghi's press conference odds shot to 60% from 20%
  • Euro interbank borrowing costs drop to near-record lows

Traders in Europe’s money markets have taken Mario Draghi at his word and are now counting on him to deliver lower deposit rates at the end of the year.

By one measure, odds jumped to 60 percent from 20 percent that the European Central Bank president will oversee a cut in the rate for holding overnight deposits by 0.1 percentage point to minus 0.30 percent at the December policy meeting.

Speculation that Draghi will produce a cut can be seen by the slump in short-dated rates across money and government bond markets.

The shift came after Draghi said Thursday that officials will review their monetary stimulus at the last meeting of the year. The Governing Council has already discussed lowering the deposit rate, he said, which they hadn’t done at the previous meeting. The rate is currently at minus 0.20 percent.

The euro overnight index average, or Eonia, rates dated for ECB meetings indicate a 60 percent chance of cut in December, compared with 20 percent on Thursday before Draghi’s press conference. The odds of a 10-basis-point cut, or 0.01 percentage point, rise to 80 percent in January and is fully priced in by April.

Traders had begun to price in the possibility of a reduction in the deposit rate in recent weeks, considering it an effective measure that Draghi might take to weaken the euro. The single currency has gained against the dollar since the ECB began quantitative easing in March, a policy tool that typically debases a currency.

The advance continued as the Federal Reserve held off on raising interest rates and traders unwound carry trades and flocked to the the euro as a haven asset, during the Chinese stock-market selloff that continued through August.

The rates that banks charge each other for three-month loans in euros, known as Euribor, have also dropped. The implied yields are at or near record lows in contracts out to September 2018. 

Goldman Sachs Group Inc. said the deposit rate could be cut to minus 0.5 percent if the euro’s strength returns.

“If Fed liftoff in December continues to be priced out and the euro stabilizes or strengthens again, Mr. Draghi’s hand will be forced,” Dirk Schumacher, an economist at Goldman Sachs in Frankfurt, wrote in a note. “This would make a deposit facility rate cut our base case in order to cap euro strength.”

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