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Draghi Outflanking Kuroda as Bearish Euro Bets Surge

(Bloomberg) — With Mario Draghi poised to start injecting unprecedented amounts of money into the euro-zone economy, he’s already beating his Japanese peer in the global currency wars.

Bets on a weaker euro by hedge funds and other large speculators last month exceeded bearish yen wagers by the most since August 2012, data from the Commodity Futures Trading Commission show. Options suggest the shared currency is headed toward a 1 1/2-year low versus the yen, which would help the European Central Bank president achieve his ambitions of boosting growth and inflation.

While March heralds the start of Draghi’s 60 billion euros ($ 67 billion) of monthly bond purchases, traders are speculating the Bank of Japan is done with expanding the pace of its own quantitative easing. Anticipation of European QE has driven yields on about $ 1.9 trillion of euro-region bonds below zero, encouraging investors to quit the 19-nation currency.

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“The euro will win the race to the bottom,” Ian Stannard, the Europe head of currency strategy at Morgan Stanley in London, said by phone Feb. 25. While the promise of QE “puts the euro under pressure,” there’s “less emphasis on the BOJ to provide further stimulus,” he said.

Gains Reversed

The euro tumbled 7.3 percent against its Japanese counterpart in 2015, unwinding some of the 45 percent advance during the previous three years. After dropping to 130.15 yen on Jan. 26, the weakest level since September 2013, it was at 134.26 as of 9:13 a.m. in London.

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While Draghi and BOJ Governor Haruhiko Kuroda insist they don’t target exchange rates, they’ve acknowledged the benefits weaker currencies can bring, from faster inflation to more competitive exports. Looser monetary policies worldwide are leading strategists to talk about a revival of the “currency wars,” a term coined by Brazil Finance Minister Guido Mantega to describe the competitive devaluations of 2010.

It’s clear who options traders think is winning the Europe-versus-Japan bout.

The premium for three-month contracts giving the right to sell the euro versus the yen, over those allowing for purchases, widened to 2.75 percentage points on Feb. 23, data compiled by Bloomberg show. That’s the most since July 2012, when Draghi made his pledge to do “whatever it takes” to save the euro.

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Further Losses

Sentiment has soured on the euro as the ECB pumped money into the economy, driving yields down so that investors are effectively paying euro-region governments to hold their cash. German five-year bond yields plunged to a record minus 0.11 percent last week, compared with positive 0.08 percent for equivalent Japanese securities on Monday.

Chris Turner, the head of currency strategy at ING Groep NV, the most accurate overall forecaster in last year’s Bloomberg foreign-exchange rankings, dismissed the idea that Draghi’s QE is already factored into the euro.

“Though some in the markets say it’s priced, and the currency doesn’t need to fall,” the experience of QE programs in Japan and the U.K. tell us differently, Turner said by phone from London on Feb. 26. QE tends to be “quite contemporaneous” in its impact on currencies, he said.

ING sees the euro falling about 10 percent by year-end to reach parity with the dollar for the first time since 2002, and predicts the yen will weaken about 8 percent versus the U.S. currency.

Euro Shorts

The euro has slumped more than 7 percent against the greenback this year, touching an 11-year low of $ 1.1098 on Jan. 26. For the past month, it’s held about there, surprising bears with its resilience as euro-region leaders wrangled over Greece and reached a provisional deal over extending the nation’s bailout.

The yen has been little changed versus the dollar since December, when it slumped to its weakest level since 2007.

Investors have roughly halved their net-short positions in the yen versus the dollar this year to 47,512 contracts, according to the latest data from the CFTC in Washington. Bets the euro will weaken increased by about 20 percent to 177,736.

Not everyone’s so sure the euro can keep falling against the yen. The ECB’s QE plan “should be in the price,” and Japan can still surprise markets by “beefing up” its own stimulus, said Daragh Maher, a strategist at HSBC Holdings Plc in London.

Boosting Inflation

Kuroda said in February he sees no immediate need to add to the 80 trillion yen ($ 667 billion) a year of sovereign bonds the BOJ’s already buying. He did signal he’s ready to adjust policy if necessary to reach his goal of boosting inflation to 2 percent. Core inflation was 0.2 percent in January when stripped of the effects of a 2014 sales-tax increase.

Draghi also is far from achieving his inflation target, with consumer prices falling 0.6 percent in January from a year earlier, matching a record low. The ECB said on Jan. 22 that QE would start sometime in March and last until at least September 2016. It may be expanded along the way.

The potential for more ECB purchases as the BOJ stands pat will push the euro 3 percent lower to about 130 yen this year, said Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore.

“The euro’s just not as far down the track as Japan,” he said.

To contact the reporters on this story: Netty Ismail in Singapore at [email protected]; Lucy Meakin in London at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Nicholas Reynolds, Paul Armstrong

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