ECB Delivering a Dovish Taper Reinforces Bets on Euro Parity

  • RBS, MUFG forecast that the euro will weaken further
  • Steepening bias to yield curves is intact, strategists say

ECB's Draghi: Tapering Has Not Been Discussed Today

The European Central Bank’s latest policy decision is reinforcing calls for the euro to drop to parity against the dollar.

The odds of the euro weakening to $1 in the next six months have risen to about 44 percent, from 31 percent on Dec. 7, the day before the ECB decision, options prices show. The euro dropped to $1.0506 on Dec. 5, the lowest since March 2015. It was last below $1 in December 2002.

ECB President Mario Draghi said Thursday the central bank will reduce its monthly bond purchases to 60 billion euros from 80 billion euros starting in April. The program will run until at least December 2017, longer than some analysts predicted. Officials also lifted the restriction of buying bonds yielding less than the deposit rate and reduced the lower-maturity bound to one year from two years, making a raft of new securities eligible for the central bank’s asset-purchase program.

The main driver of EUR/USD is short-end rates, so the ECB announcement is EUR/USD bearish, Royal Bank of Scotland Group Plc strategists, including London-based Paul Robson, wrote in a research note to clients. “It increases our confidence that EUR/USD gets to parity and EUR/GBP gets to 0.80. With growth weak, inflation low and government debt levels high, the ECB is taking big risk with its policy pivot on both growth and debt sustainability. So growth risks add more fuel to the short EUR fire.”

Here are more analysts’ reactions.

MUFG strategist Derek Halpenny

  • ECB was “a more dovish event than expected” which “reinforces the downside risks for EUR/USD”
  • That keeps bank’s forecast of a breach of parity in the first half of 2017 in play

BNP Paribas strategists including Steven Saywell

  • “We expect EUR/USD to extend its decline in the New Year, and target 1.04 by the end of Q1 2017, even as the pair seems likely to consolidate in the shorter term."

Goldman Sachs Group Inc. strategist Francesco Garzarelli

  • “The net impact of these changes in the size, duration and composition of the ECB’s demand for bonds should encourage a steepening of the EUR yield curve in both core and periphery countries, and, all else equal, keep long-dated intra-EMU spreads in check while improving the transmission of monetary policy through the financial sector"

Morgan Stanley strategists including Anton Heese

  • “The change in policy mix announced by the ECB has had an ambiguous impact on rates, with some measures being supportive, and others less so"
  • “Given the ambiguous impact these measures should have on the level rates, we refrain from recommending outright duration positions coming out of the ECB. We like 5s30s steepeners, as we think the potential for continued ECB accommodation due to the weak inflation outlook will be increasingly priced into the 5y sector while long-end Bund valuations still remain rich vs. history and are vulnerable to moving higher still due to the ECB reducing less duration from the market"
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