Euro-yen rate shows Draghi lament as Gross says sell

Draghi’s Pledge

The 17-nation currency has strengthened about 7% versus the dollar since Draghi said July 26 that he’d do “whatever it takes” to protect the euro and the region’s economy. He later outlined a plan called Outright Monetary Transactions in September that allows the ECB to buy short- maturity notes issued by euro-area nations that request aid. No country has activated the plan.

The ECB’s May 2 policy meeting will be its first since the Group of 20 summit in Washington on April 18-19. There, officials failed to criticize Japan for debasing its currency through its monetary policies, prompting options traders to trim bearish bets on the euro against the yen.

Predicting Cut

Futures contracts based on the euro interbank offered rate, a benchmark of how much banks charge to lend to one another, signal increasing expectations for the ECB to lower its main refinancing rate from the record-low 0.75% it has maintained since July. The implied yield on the contract for June was at 19 basis points, close to the lowest since Jan. 2 and down from the high for this year of 42 basis points Jan. 25.

Twenty one of 35 forecasters surveyed by Bloomberg, including UBS AG, Rabobank International and Royal Bank of Scotland Group Plc, now predict the ECB will lower its main interest rate to 0.5% next week.

Five days after the Bank of Japan unveiled an unprecedented stimulus package on April 4, a Bundesbank report showed German exports fell 1.5% in February, more than economists forecast. Germany is Europe’s biggest economy and sells about 40% of its output abroad.

That was followed on April 18 by a Finance Ministry report showing growth in Japan’s overseas sales beat analysts’ predictions by almost 1 percentage point.

“At current levels it’s OK, but if the euro appreciates to 140 yen or 150 yen, then Germany will suffer in terms of exports,” James Kwok, the London-based head of currency management at Amundi Asset Management, which oversees about 727 billion euros, said in an interview yesterday.

Risk Reversals

The premium for six-month options granting the right to sell the euro versus the yen relative to those allowing for purchases fell 10 basis points, or 0.1 percentage point, to 1.25 percentage points on April 22. That’s the biggest move in favor of the single currency since April 11, according to so-called 25-delta risk reversals. The spread has averaged 3.92 percentage points in the last five years.

“Downside risk remains in the euro area and should data continue to disappoint, the ECB is likely to act,” Fiona Lake and George Cole, analysts at Goldman Sachs Group Inc. in London, wrote in an April 19 note to clients.

Strategists are predicting even more euro strength, boosting their forecasts for the currency against the yen by 4.8% in April. Europe’s shared currency will end the year at 130 yen, according to the median of 44 economists’ and analysts’ predictions compiled by Bloomberg. At the end of 2012 they were calling for 109 yen.

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