Policy Bazookas Misfire as Euro, Yen Up Most Since at Least 2011

  • Options traders are most bullish on euro-dollar since 2009
  • Yen advances for a fourth day against the U.S. currency

Currency traders are paying little attention to hints at more currency-debasing stimulus in Europe and Japan.

The euro has gained the most this week since 2011 while the yen is poised to post its biggest weekly advance in more than six years. The gains come even as European Central Bank President Mario Draghi reiterated he’s prepared to take further action to counter lackluster inflation, and Bank of Japan Governor Haruhiko Kuroda said he may cut interest rates again.

Mounting concern that a slowdown in China will spread to the rest of the world is drowning out signals of further stimulus, and instead enhancing the appeal of Japan and the euro area, where current-account surpluses offer a haven from tumultuous markets. Prospects for higher interest rates in the U.S., meanwhile, are receding, on speculation the Federal Reserve can’t tighten monetary policy against a backdrop of global turmoil.

“Central banks have hit a wall,” said Alessio de Longis, a New York-based money manager in OppenheimerFunds Inc.’s global multi-asset group, which manages $5 billion. “I’m not that convinced at all that any policy initiative from the BOJ or the ECB gets any traction in financial markets, especially the currency.” De Longis sees further yen strength and the euro trading in a range.

Europe’s common currency has jumped 3.5 percent this week to $1.1209 as of 5 p.m. New York time. The yen has retraced all its losses from last week, when the BOJ cut rates below zero, touching its strongest in two weeks. It’s added 3.6 percent since Friday.

Challenge Ahead

Central bankers’ battle against inflation may be about to intensify. The European Commission said Thursday that euro bloc inflation would average 0.5 percent this year, half the pace forecast in November, and far below the ECB’s goal of just under 2 percent. 

In Japan, policy makers have postponed a deadline for reaching 2 percent inflation three times in less than a year. A strong currency hurts the fight against deflation by depressing import prices.

Options show traders preparing for further euro and yen gains. The premium for euro calls, which grant the right to buy the euro versus the dollar, over puts, which confer the right to sell, is the highest since the the global financial crisis. Similar contracts on Japan’s currency show traders are near the most positioned for yen strength since August 2011.

“Central banks, like the ECB and BOJ, face diminished foreign-exchange returns to unorthodox policies,” Alan Ruskin, global co-head of foreign-exchange research at Deutsche Bank AG in New York wrote in a note Thursday. “The pricing out of Fed rate hikes finally trumped the ECB and BOJ actions.”

Traders see less than a 50 percent chance that the Fed will raise rates at all in 2016, futures contracts show. Financial conditions have tightened in the U.S., New York Fed President William C. Dudley said this week, days after Fed Vice Chair Stanley Fischer noted that persistent tighter conditions could mean slower growth in the U.S.

Traders are also mindful of their experience in December, when Draghi delivered a program that was perceived to be smaller than what markets had expected, sparking the euro’s biggest jump since 2009.

“For the euro to come down, the ECB would have to sound much more dovish than they do now,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S in Copenhagen. “Draghi is always very careful, but the market is even more careful in over-interpreting them this time around given our experience the last time around.”

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