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Euro Gain Looms as QE Expectations Haunt Draghi: Market Reversal

The euro will probably extend gains from an 11-year low against the dollar on prospects the European Central Bank will fail to exceed the market’s expectations for monetary stimulus this week, Nomura Holdings Inc. said.

The single currency may rebound to $ 1.20, from $ 1.1579 at 7:26 a.m. in London, should the ECB disappoint investors on Jan. 22 by merely reiterating that it is ready to take action when deflationary risks heighten, said Yunosuke Ikeda, Nomura’s Tokyo-based head of foreign-exchange strategy. A gauge of the euro’s movement signaled it dropped too fast after the Swiss National Bank abandoned the franc’s cap against the euro.

“Even if the ECB decides to introduce quantitative easing, a lack of details could send the euro back to levels before the Swiss move last week,” Ikeda said. “The euro could surge to $ 1.20 if the ECB only keeps repeating itself.”

Options are signaling that the market has fully priced in QE by the ECB, Ikeda said. The euro’s one-month risk reversals versus the dollar plunged to minus 2.39 percent on Jan. 16, the lowest since May 2012. A minus figure shows that demand for the right to sell the currency outweighs demand to buy.

The euro slid as much as 1.9 percent versus the greenback on Jan. 15, a day before touching $ 1.1460, the weakest since November 2003.

Relative Strength

The euro’s 14-day relative-strength index versus the dollar was at 18 today, below the 30 level that may indicate the currency has weakened too much and is poised to rebound. The gauge has been in oversold territory since Jan. 2.

ECB President Mario Draghi and his colleagues are unlikely to exceed the market’s expectations for stimulus to avoid upsetting Germany, Ikeda said. With plunging oil prices tipping the inflation rate below zero, policy makers have been arguing in media interviews and speeches over how to react. Much of that has been in Germany, where criticism of QE is strongest.

The selloff in the euro continued last week despite a drop in U.S. yields, Ikeda said. The two-year Treasury yields fell to 0.41 percent on Jan. 15, bringing the spread over comparable German notes to the narrowest in six weeks.

“The euro selling had been accelerating even as U.S. yields fell, leaving the impression it was oversold a bit,” Ikeda said. A rally will provide a good selling opportunity over the longer term, pushing the euro toward $ 1.10-$ 1.12 in June as the Federal Reserve may tighten, he said.

Hedge funds and other large speculators increased bearish euro positions for a fourth week, to a net 167,851 contracts, the latest data from the Washington-based Commodity Futures Trading Commission show. That’s near a record high of 214,418 reached at the height of the European debt crisis in June 2012.

While diverging monetary policy between the ECB and the Federal Reserve justify euro selling, fundamentals show the single currency is ripe for a rebound, said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo.

“Markets are not looking at the euro zone’s current account surplus and deflation, factors that underpin the euro,” he said. “Everybody is just too tilted toward betting against the euro.”

To contact the reporters on this story: Hiroko Komiya in Tokyo at [email protected]; Chikako Mogi in Tokyo at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Naoto Hosoda, Tomoko Yamazaki

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