When European Central Bank President Mario Draghi vowed July 26 to do “whatever it takes” to defend the euro, he succeeded in stemming a slide that pushed the 17- nation currency down about 6 percent since late March against its major counterparts.
Traders in the options market responded by raising bets against the currency of the developed world’s worst-performing economy the most in 11 weeks. Options to protect against further weakness climbed in the past two weeks by the most since May.
Between Jan. 12, 2011, when German Chancellor Angela Merkel vowed to do “whatever is needed to support the euro” and Draghi’s almost-identical pledge, Portugal, Spain and Cyprus sought bailouts and the region’s $13 trillion economy teetered on recession. Growth will trail its Group-of-10 peers through at least 2014, according to Bloomberg surveys, as companies from Siemens AG, Europe’s largest engineering company, to sporting- goods maker Puma SE cut their outlooks.
“Whatever the ECB does, it can’t conjure growth out of nowhere,” Frances Hudson, a global strategist at Standard Life Investments in Edinburgh, said in a telephone interview on Aug. 2. “The euro could go down further. The markets are not really willing to give them the benefit of the doubt anymore.”
While traders aren’t anticipating a failure of the common currency -- it’s still above the average versus the dollar since its 1999 debut -- the euro’s depreciation shows investors see better opportunities almost anywhere else in the world.
The euro slipped 0.05 percent last week based on Bloomberg Correlation-Weighted Indexes, which track it against a group of nine currencies from the dollar to Sweden’s krona. It weakened 0.2 percent to $1.2362 at 9:59 a.m. London time, from the close on Aug. 3, when it surged 1.7 percent. It gained 0.5 percent against the greenback last week. The lifetime average since January 1999 is $1.2087. The euro declined 0.3 percent to 96.90 yen, after rising 0.5 percent in the five days to Aug. 3.
Even as the euro stabilized, the price of protecting it from further declines increased. Three-month options show that the premium for puts, which grant the right to sell the euro versus the dollar, over calls, which confer the right to buy, increased to 1.62 percentage points at the end of last week from 0.85 percentage point on July 20.
The gain is the biggest since the period through May 18, when Greece headed toward elections critical for its continued membership in the currency union.
Traders are also growing more bearish over the next year. The one-year rate reached 2.60 percentage points on Aug. 2, from a 1.96 percentage points on July 20, which was the most bullish since July 2011.
Futures traders are also wagering that the euro will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 138,994 on July 31, compared with net shorts of 155,066 a week earlier. Even as the number dropped, the euro had a net long position, or bets on a gain, of 6,726 in August last year.
Bank of America Corp. strategists lowered their euro forecasts on Aug. 1, predicting it will weaken more than 7 percent to $1.15 by year-end, from a previous prediction of $1.25. The Charlotte, North Carolina-based lender also sees the currency depreciating more than 7 percent to 90 yen.
“We’re a lot less optimistic that policy makers will be able to get their act together quickly,” John Shin, a senior Group-of-10 foreign-exchange strategist at Bank of America in New York, said in a telephone interview on Aug. 3. Any signs of strength are an “opportunity to sell,” he said.
The euro is declining against major currencies, reaching all-time lows of 1.16057 versus the Australian dollar on Aug. 2 and 1.4967 against New Zealand’s dollar on Aug. 3.
With Greece, Italy, Portugal, Slovakia, Slovenia and Spain already in recession, the malaise may be spreading to healthier economies. Germany, which accounts for about 27 percent of the euro area’s output, saw slower growth in each of the past four quarters through March from the year-earlier period as orders at exporters fell.
Munich-based Siemens said July 26 that reaching its full- year earnings goal has become harder. Puma cut its 2012 sales and profit forecasts last month. The Herzogenaurach, Germany- based company is preparing for European doldrums “until at least 2013,” General Manager Finance Michael Laemmermann said July 26 on a conference call.
The euro-area economy may contract by 0.4 percent this year, compared with an average expansion of 1.29 percent in the G-10, surveys of economists by Bloomberg show. Output in Europe will then increase 0.6 percent in 2013, versus an average of 1.6 percent in developed nations, surveys show.
Europe’s slowdown makes it harder for governments to generate enough tax revenue to reduce their budget deficits.
Ireland’s shortfall this year will be 8.5 percent of gross domestic product, with Greece at 7.2 percent, according to the International Monetary Fund. Spain’s will probably be 6 percent, the forecasts show. At 3.2 percent of GDP, the region’s deficit would still be less than the 8.1 percent for the U.S., according to the Washington-based IMF.
“There’s further scope for the euro to fall,” Neil Williams, the chief economist in London at Hermes Fund Management, which oversees about $46 billion of assets, said in a telephone interview on Aug. 2. “We are in the third year of the crisis and even if we have a magic wand and manage to solve the problems in Greece and Spain, all that would do is take us back to the underlying problems,” such as the differences in productivity among euro-zone nations, he said.
That’s unless the Federal Reserve takes more steps to boost U.S. growth, according to BNP Paribas SA.
The euro will rise against the dollar as a slowing U.S. economy prompts the Fed to inject more money into the financial system through bond purchases as soon as September, debasing the greenback, BNP Paribas said. The currency will recoup its losses against the dollar since January to end the year at $1.35, a more than 4 percent gain from its 2011 close of $1.2961, the bank said.
“More stimulus from the Fed is going to put pressure on the dollar,” Mary Nicola, a New York-based currency strategist at BNP Paribas, said in an interview on Aug. 1. The common currency may climb versus the dollar even as it declines against others, she said.
The euro strengthened almost 15 percent against the dollar as the Fed bought $2.3 trillion of mortgage and Treasury debt from December 2008 to June 2011 in two rounds of so-called quantitative easing, or QE, seeking to cap borrowing costs.
U.S. central bankers, led by Chairman Ben S. Bernanke, “will provide additional accommodation as needed” to bolster the expansion, the Federal Open Market Committee said in a statement on Aug. 1.
While payrolls in the U.S. climbed 163,000 in July, more than the 100,000 median estimate of 89 economists surveyed by Bloomberg, the unemployment rate unexpectedly rose to 8.3 percent from 8.2 percent, Labor Department figures in Washington showed on Aug. 3.
The euro retraced its QE-based gains as Europe’s leaders failed to resolve differences on how to end the debt crisis.
Draghi “didn’t have the firepower to make the claim that he made” on July 26, said Hudson at Standard Life, Scotland’s second-biggest money manager, with about $240 billion of assets at the end of 2011. Standard Life holds a smaller percentage of the currency than is contained in benchmark indexes, she said.
ECB officials are devising a bond-buying plan that would focus on shorter-term maturities, be conducted in a way to soothe investors’ concern about which creditors get paid first, and not breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt last week. He said that Germany’s Bundesbank has reservations.
Germany, along with AAA rated countries Finland and the Netherlands, has rejected the issuance of common debt favored by Prime Ministers Mario Monti of Italy and Mariano Rajoy of Spain as a way to cement European unity.
Strategists have cut their euro forecasts in each of the three months through July as economic releases signaled the economic outlook was worsening. The median analyst prediction compiled by Bloomberg is for the currency to end the year at $1.23, down from a forecast of $1.30 on April 30.
“A solution to the crisis will take a long time,” Brad Bechtel, the head of sales at Stamford, Connecticut-based Faros Trading LLC, who forecasts the euro at $1.16 by the end of the year, said on July 27. “The decisions are very difficult to implement and that’s what is sowing all the seeds of doubt in the market. There’s probably going to be a temporary bounce in the euro, followed by further weakness and a move lower.”
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