The Euro-dollar gained more than four “big figures” yesterday, in a dramatic and severe reversal for all those who were betting on continued weakness in the Single Currency, after a farcical leak by none other than the Financial Times newspaper was followed by an ECB monetary policy statement that failed to meet expectations on almost all fronts.
Firstly, the leak: The FT chose to tweet, about ten minutes before the ECB interest rate announcement was due, that there would be no reduction at all to the deposit rate. This was based on the ubiquitous “officials close to the matter who spoke on conditions of anonymity”. Presumable the same ones who have been talking to Reuters and Bloomberg in recent times, and in the process setting off all sorts of alarms and excursions in the Forex markets. Frankfurt apparently leaks like a sieve (just like Brussels).
This tweet immediately started a bout of short covering, as some large players who had been depending on a cut of anything between 0.3% and 0.5% in the overnight rate realised that their positions would be loss making if there was no cut at all.
Draghi fails to deliver
Then Mario Draghi announced a cut in the deposit rate, but only of 0.1%. While this proved the FT wrong, it was also far too little to satisfy the market. Then, when it was announced that there was to be no extension in the take-up rate of bonds for QE (the market expected an additional €20 billion at least, on top of the €60 billion per month already being implemented) the rout was complete and the short covering began in earnest. The ECB president did announce a time extension for QE, that municipal bonds would join the sovereign bonds already being taken up, and that expiring bond payments would be recycled, but this was far too little to satisfy expectations.
Truly a nightmare for that large cohort of Foreign Exchange traders who had bet a lot on a different outcome for this monetary policy meeting.