Stimulus Bets Undercut Yen, Euro as Draghi Faces Brexit Fallout

  • ‘Draghi will keep his options open,’ CA’s Forrester says
  • Odds of Fed rate increase mount as peers more likely to cut

Is Brexit Making European Equities Less Attractive?

Policy divergence is back, sending the yen, euro and New Zealand dollar to multi-week lows against the dollar.

While the odds are climbing for higher U.S. interest rates this year amid a strengthening recovery, Brexit risks have raised the prospect of a new wave of stimulus from Tokyo to Frankfurt and beyond. The yen slid to a six-week low as Kyodo News reported the government is considering a 20 trillion yen ($187 billion) package, about double its initial plan. The euro was near a three-week low before the European Central Bank meets Thursday, amid speculation it will signal further easing. The kiwi dropped after the Reserve Bank said further monetary easing may be required to lift inflation.

“Mario Draghi will keep his options open for further easing,” helping fuel a gradual decline in the euro amid broad dollar strength, said David Forrester, a foreign-exchange strategist at Credit Agricole SA’s corporate and investment-banking unit in Hong Kong. “The yen has already sold off a lot in anticipation of the government’s fiscal stimulus package and next week’s BOJ meeting. We’re looking for it to continue tracking lower.”

The yen fell 0.2 percent to 107.06 per dollar as of 6:48 a.m. in London after dropping to 107.49, its weakest since June 7. The euro was little changed at $1.1030 after declining to $1.0982 on Wednesday for the first time since June 27.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed after advancing for a fourth day Wednesday -- the longest streak since May 9.

The odds that the Fed will increase borrowing costs this year have risen to 47 percent from 35 percent a week ago, according to futures data compiled by Bloomberg. At the start of the month, the probability was just 12 percent.

A Bloomberg gauge of U.S. economic surprises has climbed to the highest since December 2014.

“The prospect of fed tightening is back on the agenda supported by better than expected U.S. data releases,” Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney, wrote in a client note. Gains in dollar indexes above recent ranges suggest the currency is at the start of a significant uptrend, he wrote.

ECB Decision

While the ECB is forecast to leave its key rate unchanged Thursday, derivatives prices show a 52 percent likelihood of a cut by October.

The Bank of Japan meets July 28-29, amid rising expectations for additional stimulus that could include so-called helicopter money. Seventy percent of clients and staff in a Citigroup Inc. survey released this week said they expect action at the gathering, with the rest predicting additional easing in September or later.

The New Zealand dollar dropped for a third day as swaps traders priced in an 89 percent chance of a RBNZ rate reduction on Aug. 11, compared with 75 percent odds the previous day.

In an assessment of economic conditions, policy makers blamed the currency for “holding down tradable goods inflation” and making it difficult to meet the inflation target of 1 percent to 3 percent.

The kiwi slid 0.6 percent to 69.88 U.S cents, after dropping to 69.52, the lowest since June 8.

“Today’s comments from the RBNZ effectively confirm a rate cut on the 11th of August,” said Matt Simpson, a senior market analyst at ThinkMarkets in Singapore. “They used their economic update to confirm distaste at the higher kiwi. We’re more surprised that they left it so long.”

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