Coming into this week, currency markets widely reflected the view that the European Central Bank (ECB) would lower its deposit rate to -0.4%, further weakening the euro in the process. Hedge funds were among the speculators piling into bearish euro positions ahead of Thursday’s ECB announcement.
However, the ECB roiled global markets, opting to lower its deposit rate to -0.3%, news that sent the euro surging against the dollar. Although it closed lower Friday, the CurrencyShares Euro Currency Trust (NYSEArca: FXE) still finished the week with a gain of more than 2%, meaning some hedge funds were crimped along the way.
Prior to the Thursday announcement, currency traders were large bearish on the euro currency. For instance, one trader on Wednesday bought 52,000 $28 call options, or roughly a $5 million bet, in the ProShares UltraShort Euro (NYSEArca: EUO), which provides -2x or 200% of the inverse return of the U.S. dollar price of the euro on a daily basis, reports Chris Dieterich for Barron’s.
The euro currency strengthened Thursday after the lighter-than-expected ECB stimulus package disappointed market expectations. The central bank extended quantitative easing by six months until March 2017 at the current rate of 60 billion euros per month and reduced its deposit rate by 10 basis points to minus 0.3%, Bloomberg reports.