Investor Fears of Another Disappointing Move from the ECB Create Opportunity, According to Citi
U.S lender Citibank forecast the European Central Bank (ECB) could surprise investors with a more aggressive banquet of easing than markets are currenctly pricing in.
In December the European Central Bank disappointed markets after they announced a set of new easing measures which investors judged too tame to stimulate growth, and the euro surged higher, instead of falling as would normally be expected.
In a recent research note, analysts at Citi, argued that investors may still be ‘shy’ of shorting the euro - “shorting” involves selling a currency so you profit if it falls in value – because they fear the same thing will happen at the ECB meeting in March.
They view expectations of ‘more of the same’ as exaggerated and instead see a risk of the ECB going over-kill instead and introducing more aggressive easing measures than expected.
Their view offers market participants with an opportunity to profit from a surprise move down in the currency as a result of ECB over-kill:
“Investors want to short EUR ahead of Thursday’s ECB meeting but are wary given the disappointment in December as they lean towards more modest stimulus from the ECB.
“However, the ECB’s mantra is to surprise and with positioning now decidedly leaning towards a less dovish ECB (that also explains the inability of USD to rally post the February jobs report Friday), shorting EUR is now seen as the better risk/ reward play tactically.”
ING View a 1.5% Minimum Downside Potential for EUR/USD
Citi’s bearish bias echoes that of major Dutch lender ING, who said in a recent note that they expect the EUR/USD pair to fall by 1.5% after the March meeting if their base case scenario is met.
ING’s Analyst Viraj Patel forecasts that the ECB is likely to lower the deposit rate by -0.2% (lower than the consensus of just over -0.1%) and to increase monthly asset purchases by 5bn euros.
Monthly asset purchases refer to the bonds – or IOUs – the central bank buys each month from high-street of commercial banks, in what is called quantitative easing, which is intended to help provide banks with more money to lend to the individuals and businesses in the wider economy, thus helping to stimulate more demand. Currently the programme makes 60bn of such purchases per month.
According to their models the 5bn extra a month and -0.2% deposit rate cut together would lead to a devaluation in the euro-US pair of 1.5.
"The fact that still somewhat less than 10bp of rate cuts is not priced in by the market (ie, the market is pricing a little bit more than a 10bp cut vs our call of a 20bp cut) and EUR5bn increase in monthly QE should be worth of around 1.5% downside to EUR/USD on the day.”
Chart View
The risk of the ECB surprising with more stimulus than expected and effecting further down-side in the EUR/USD pair fits well with our marginally bearish technical forecasts.
The pair is stuck in a range between 1.0500 and 1.1500 in the medium term.
It has just moved higher in the last few days, and has reached the level of the Monthly Pivot Point at 1.1021, where it is currently situated.
The monthly pivot is a line constructed from the previous month’s High, Close, Open and Low prices, which traders use to buy and sell at, and which it is likely to provide an obstacle to further gains.
The MACD indicator in the bottom pane is below the zero-line which is a bearish signal, and indicates the pair will probably start to move lower again soon.
Confirmation of further down-side would come from a break below the 1.0800 level, to an initial target at 1.0700, and then the S1 Monthly Pivot level at 1.0663.
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