MONEY MARKETS-Growing ECB rate cut bets risk falling flat

Wed Apr 3, 2013 7:04am EDT

* Euribor futures rising as speculators bet on dovish ECB

* Market exposed to selloff if ECB offers nothing new

By William James

LONDON, April 3 (Reuters) - Expectations that the European Central Bank could signal an imminent interest rate cut on Thursday has left short-term interest rate futures primed for a selloff if the bank's rhetoric falls short.

A run of data confirming the euro zone remains stuck in recession, combined with unease after an unprecedented levy on bank deposits in Cyprus has led some to bet on the central bank signalling more monetary easing is in the pipeline.

That has helped push Euribor futures , which generally rise as euro zone interest rate expectations fall, around 5 ticks higher over the last two days and back to levels last seen more than a fortnight ago.

"Markets seem to be entering the meeting with some expectations of a more dovish flavour in the press conference in light of the relatively weak data we have seen recently," said Luca Cazzulani, deputy head of fixed income strategy at Unicredit.

On Tuesday, surveys showed manufacturing across most of Europe's major economies endured another month of deep decline in March, adding extra gloom to an already murky picture.

Nevertheless, none of the 73 economists polled by Reuters on March 27 expected the ECB to cut rates, leaving scope for a correction in short-term interest rate futures if markets see little change in tone.

"We expect nothing will come in terms of rate changes or unconventional monetary policy... It's slightly more likely that investors who are expecting a cut or a significant step up in dovishness, will again be disappointed," Cazzulani said.

Disappointment could see investors ditch Euribor futures contracts, pushing prices down around 5 to 10 ticks and wiping out recent rises, Cazzulani said.

Analysts compared the situation to the March policy meeting when a perceived lack of dovishness from ECB President Mario Draghi prompted those who had taken up long Euribor future positions to sell the contract and drive prices down.

"(This month) it could be the same as last time if I'm right that he will be very dovish but stop short of indicating any near-term rate cut," said Anders Svendsen, chief analyst at Nordea in Copenhagen.

"The market is all facing one way... More or less every one agrees that he's unlikely to give anything other than a dovish comment."