Euro Traders Bet on Weakness Before ECB Rate Decision

Talking Points:

Traders Bet Euro Weakness Ahead of ECB Policy Monetary Announcement
Deposit Rate Cut Hint or Fully Neutral Posture to Trigger Greatest Volatility
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All eyes are on the monetary policy announcement from the European Central Bank. Economists expect no changes this time around, but markets seem positioned for a dovish outcome, perhaps via rhetoric setting the stage for stimulus expansion in December.

Options positioning has shown an increasingly negative skew since the final set of September’s Eurozone CPI figures confirmed price growth dipped back into deflationary territory. The premium traders are willing to pay for the right to sell the Euro versus an equivalent right to buy has jumped to 0.63, the highest in over three months.

That suggests investors expect the single currency to head lower, which seemingly foreshadows a dovish turn in the ECB’s posture. A steady downward drift in borrowing costs implied by Eonia futures reinforces the idea that markets are setting up for stimulus expansion.

Expanding the range of QE-eligible assets and/or extending the expiration date of the current program beyond September 2016 are probably priced in already. A nod toward such a move in ECB President Draghi’s post-announcement press conference punish the Euro in the near term, but lasting follow-through might prove challenging.

Lasting downside momentum is likely to follow if Draghi hints at a possible reduction in the deposit rate having previously suggested that the current -0.2 setting represents a floor. Alternatively, a neutral posture would clash with market pricing and send investors scrambling to reposition, pushing the common unit swiftly higher.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

21:00

NZD

ANZ Job Advertisements (MoM) (SEP)

2.1%

–

-1.5%

0:30

AUD

NAB Business Confidence (3Q)

–

1:45

CNY

MNI Business Confidence (OCT)

55.6

–

51.3

European Session

GMT

CCY

EVENT

EXP/ACT

IMPACT