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 Traders and strategists at the major banks say an extended monthly
bond-buying programme, outlined by Reuters and other news services
on Wednesday, is fully priced-in to the current value of the euro.
That argues for a clearing out of many of the bets on the currency
weakening against the dollar that have made money for investors over
the past six months and the euro rose almost a cent on Wednesday.
But traders also say conviction that the single currency is headed
broadly lower over the next year means most will tend to sell into
that sort of rally. After some early losses in Europe, it had inched
up 0.1 percent on the day to $1.1622.
"The market is convinced the euro will continue to fall, but (also)
that the best strategy is to sell into rallies – given this
intention, I struggle to see euro strength getting out of hand,"
Josh O'Byrne, a strategist with Citi in London, said.
"Short euro is still not as heavily positioned a trade as some
people think."
The ramifications of ECB bond-buying are extensive and the run in
has made for one of the most active and volatile weeks in major
currency markets in years.
The Swiss franc, up almost 20 percent since the Swiss National Bank
removed its cap on the currency against the euro last week, gained
more than half a percent in early European trade. It had handed back
some of those gains by 1008 GMT, trading 0.2 percent higher at 99.66
francs per euro.
"There is the suspicion that the SNB has been intervening
intermittently (against the franc)," O'Byrne said. "But I think (in
the context of the ECB) it might be reluctant to do so today and
that may be helping the franc."
CROWN DOWN
Since the change in Swiss policy, some investors have shifted money
towards another currency with a controlled rate against the euro -
Denmark's crown.
In response, the Danish central bank is expected to cut interest
rates for the second time this week if the ECB acts on QE on
Thursday and traders said it intervened heavily to drive the crown
to a 5-month low in morning trade.
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"They have been intervening, but today they just started to hike the
bids," said a senior trader at one Nordic Bank. "They started at
7.4345 crowns per euro and pushed it to 7.4430."
The crown, pegged to the euro, weakened as much as 0.25 percent, its
largest single-day percentage drop in Reuters data beginning in
1999. It last traded at 7.4448 crowns, 0.13 percent weaker on the
day.
Many major banks forecast the euro over the next 1-2 years heading
to $1.10, or even to parity for the first time since the aftermath
of its launch in the 1990s.
That reflects deep-rooted concern in Europe about the prospect of an
era of very low growth, and possibly deflation, at a time when the
United States seems to be recovering robustly.
There are doubts, however, about how much worse it can get for the
euro. IMF chief Christine Lagarde and the chairman of Spanish bank
Santander both told a panel at the World Economic Forum in Davos
that the euro now looked fairly valued.
"In the short-term we could stay at these levels or go down a bit
further," said Brian Jacobsen, a Chief Portfolio Strategist with
Wells Fargo Asset Management.
"But let's face it: thereafter the German industries that were very
profitable at $1.39 are only going to be more so at these levels. I
think the euro will appreciate to $1.25, that's a reasonable
valuation."
(Editing by Toby Chopra)
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