A trader has placed a massive bet that the European Central Bank (ECB) will accelerate its pace of interest rate cuts to stimulate the Eurozone economy. According to interest rate traders familiar with the deal, the trade uses futures options linked to the three-month Euribor financing rate. If policymakers lower the deposit rate to 1.75% or lower by mid-next year, the trade will net €375 million ($406 million) for an initial cost of €6 million.
These traders say that if the ECB cuts rates to this level from the current 3.25%, plus the initial €6 million cost, it would equate to a sixfold return. As they are not authorized to speak publicly, these traders have requested anonymity.
Swap pricing anticipates that key interest rates will fall to 2% by June. Last week, the money market increased bets on a 0.5 basis point rate cut in December, following a second consecutive month of contraction in Eurozone private sector activity, with little sign of recovery in Germany and France.
If price growth slows, this week's inflation data could bolster expectations for interest rate cuts. According to a Bloomberg survey of analysts, while data from Germany and France are expected to rebound in October, the Eurozone's core data—excluding more volatile components—is projected to slow for a third consecutive month to 2.6%.
Advertisement
Given Germany's reliance on imported energy, a plunge in oil prices is a catalyst for further easing as tensions in the Middle East are expected to ease. Germany's 10-year breakeven rate fell for a fourth consecutive day to 1.77%, the lowest level since early October last year. Breakeven is derived from the difference between conventional yields and yields adjusted for inflation.
Thierry Wizman, a strategist at Macquarie Group Ltd., wrote in a client report: "The ECB may focus on the decline in inflation expectations ahead of the December 12 policy meeting."
"This, coupled with signs of a financial crisis, could lead to a 50 basis point rate cut."
Leave A Reply