Traders confident in Draghi’s efforts to weaken euro

Traders are showing confidence in Mario Draghi’s ability to weaken the euro and stave off deflation, even as the initial results of a key part of the European Central Bank president’s plan fell below estimates.

Mr Draghi has signalled he wants to boost the central bank’s balance sheet to as much as €3 trillion of assets from €2tn, expanding the supply of euro in the process. Yet, when the ECB went to lend cash to banks under its first targeted longer-term refinancing operation, they borrowed just €82.6bn.

Companies from UBS Wealth Management to Morgan Stanley say they aren’t discouraged, and the 18-nation currency is poised to depreciate further as more euro make their way into circulation.

“Mr Draghi’s main message is clear,” said Thomas Flury, the head of foreign exchange research at the Swiss money manager. “The ECB wants to have a big balance sheet, and there’s a problem with deflation expectations, and therefore they will do more.”

The euro will tumble about 6% to $1.20 in the next year, according to Mr Flury.

A weaker currency suits Mr Draghi. It makes euro-region exports more competitive, while stoking inflation by making imports more expensive. At 0.4% in August, annual inflation remains a fraction of the ECB’s target of just under 2%. Growth in manufacturing and services has slowed to the weakest this year, and business confidence in Germany is at a 17-month low, reports showed this week.

ECB policymakers have stepped up efforts to boost the Frankfurt-based central bank’s balance sheet after lowering their three key interest rates and announcing the targeted longer-term refinancing operations, or TLTROs, in June. They cut borrowing costs again this month and announced plans to buy asset-backed bonds.

The success of the plan isn’t assured. BlackRock, the world’s biggest money manager, said the plan to pump another €1tn into the economy is “ambitious.”

The ECB’s four-year TLTRO loans are intended to spur lending to the real economy, with the offers of cheap cash tied to the size of banks’ loan books. Eight portions of funding will be offered through 2016.

— Bloomberg