Draghi’s Euro Warning Seen as Cheap Talk by Traders
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For currency traders, talk is cheap, even when the person speaking is the president of the European Central Bank.
Mario Draghi’s suggestion this weekend that the ECB may ease policy to address the euro’s advance marked a strengthening of a position he’s been setting out for weeks. Yet the 18-nation currency has shrugged off his repeated comments and climbed since the beginning of March, while options traders are about the least bearish on the euro since November 2009.
The challenge for Draghi is capping euro gains that have slowed inflation to a quarter of the ECB’s 2 percent target and which run the risk of the sluggish growth that blighted Japan in the 1990s. Traders are trying to judge whether the central bank head is willing to back his words with sufficient firepower to end a 20-month rally in the shared currency.
“The ECB will probably continue with these types of comments, but talk is cheap,” Athanasios Vamvakidis, the head of Group-of-10 foreign-exchange strategy at Bank of America Corp. in London, said yesterday in a phone interview. “The market will need to see action for the euro to weaken substantially.”
Inflation Signal
Vamvakidis said he expected the euro to weaken below $1.35 in the “next few months,” driven by improvements in the U.S. economy that will enable the Federal Reserve to keep cutting its quantitative-easing program. The median estimate in a Bloomberg strategist survey is for a decline to $1.36 by June 30 and $1.30 by year-end, from $1.3813 as of 8:14 a.m. in London.
Draghi told reporters at the International Monetary Fund meeting in Washington on April 12 that “the strengthening of the exchange rate requires further monetary stimulus.” While the euro tumbled 0.5 percent in London trading yesterday, that was only its biggest drop since March 19 and still left it 0.6 percent higher since the start of the year.
The 18-nation currency is being supported by speculation the Fed won’t accelerate the pace of eventual interest-rate increases and investor appetite for Europe’s higher-yielding assets, such as Greece’s oversubscribed, 3 billion-euro ($4.1 billion) bond sale that last week ended the nation’s four-year exile from international debt markets.
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