Euro bears’ wishlist spells extent of ECB’s challenge

Bloomberg

European Central Bank President Mario Draghi will have to deliver plenty to meet the expectations of euro bears next week.
With Draghi under increasing pressure to boost inflation in the euro region, investors are preparing for a range of measures at next week’s policy meeting, including a cut to the deposit rate and a boost to the ECB’s quantitative-easing plan. Even so, memories of the central bank’s December gathering are proving hard to shake off. That day Draghi underwhelmed markets with his package of stimulus measures, sparking the euro’s biggest rally since 2009.
“Expectations for ECB to meet and exceed are very high, so it will be tough to find a package of measures that does so,” said Alan Wilde, head of fixed income and currencies at Baring Asset Management in London, which manages about $36 billion.
Wilde plans to sell the euro before the meeting, predicting that the central bank will deliver a rate cut, increased monthly debt purchases and widen the spectrum of securities that they are eligible to buy.

More Stimulus
He’s not alone in expecting further declines. The median estimate of analysts surveyed by Bloomberg is for the euro to weaken to $1.08 by year end, with almost a fifth of forecasters looking for a drop to parity with the dollar for the first time since 2002 as the central bank expands its currency debasing stimulus.
Traders are pricing in an 84 percent chance that the ECB will cut the deposit rate to minus 0.4 percent at its March 10 meeting, and a 16 percent chance it’ll be lowered to minus 0.5 percent, according to data compiled by Bloomberg using swaps on the euro overnight index average. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels. There’s a more than 75 percent chance the rate will be minus 0.5 percent or below by the end of the year, the data show.
Investors, including Daniel Loughney, a bond portfolio manager at AllianceBernstein, are also calling for an increase in the ECB’s 60 billion-euros ($66 billion) of monthly bond purchases next week.
“I don’t think the ECB will disappoint,” Loughney said.

Increasing Unease
The euro, which had been sliding in the run-up to the meeting, recovered from a one-month low this week after a mixed U.S. jobs report raised doubts about the strength of the U.S. economy. The shared currency added 0.6 percent from Feb. 26 to $1.1005 as of the 5 p.m. New York close on Friday, after dropping to as low as $1.0826 on March 2.
Still, increasing unease ahead of the decision pushed one-week euro-dollar implied volatility to 15.3 percent on Friday, the highest since December, according to data compiled by Bloomberg. The euro jumped 3.1 percent after the ECB’s Dec. 3 meeting, surging from a nine-month low, when the central bank cut the deposit rate less than some analysts predicted and failed to boost the pace of their monthly bond purchases.
“It is striking that the ECB has said very little in the run-up to this meeting,” said Mark Dowding, a London-based money manager at BlueBay Asset Management LLP . “There’s a lot of uncertainty.”