* Euribor futures rise to 4-6-week highs on 2013-2016 strip
* Lower rates ease pressure on ECB to relax policy
* Rate hike expectations pushed back by at least a quarter
By Marius Zaharia
LONDON, Sept 19 Euro zone money market rates
fell to six-week lows on Thursday after the Federal Reserve
unexpectedly stuck to its $85 billion-a-month stimulus
programme, easing pressure on the European Central Bank to relax
The Fed's shock decision on Wednesday means global liquidity
conditions will stay loose for longer than previously expected,
exerting downward pressure on interbank borrowing rates.
The recent peaks in short-term interbank euro rates were a
source of discomfort for the ECB and President Mario Draghi
warned earlier this month that the levels were "unwarranted" as
economic recovery in the euro zone was still "green".
The reduced expectations of the ECB easing policy further
limited the fall in money market rates.
"(The Fed decision) underscores that central banks remain
dovish ... (but) it surely reduces the risk of another ECB rate
cut," said Nordea chief analyst Anders Svendsen in Copenhagen.
The one-year, one-year forward Eonia rate, one of the most
traded money market instruments which shows where one-year Eonia
rates are seen in one-year's time, fell 8 basis points to 0.36
percent, 20 bps down from September highs.
Euribor futures were up to 22 ticks higher across
the 2013-2016 strip, with most contracts hitting 4-6 week highs.
Higher Euribor futures indicate expectations of lower
three-month Euribor lending rates, which are a gauge of future
European Central Bank policy rates and liquidity conditions.
The December 2016 future rose the most, hitting a
one-month high of 98.40, indicating expectations that the
Euribor rate would settle at 1.6 percent at the end of 2016.
The December 2014 contract, the most liquid, hit a
six-week high of 99.51, implying a 0.49 percent rate.
That was still higher that the implied 0.40 percent hit in
July in the wake of the ECB's promise to keep rates low for an
extended period and some way off the 0.23 percent rate implied
in May before the Fed first signalled it could trim stimulus.
"Perhaps we can get back to levels seen at the beginning of
July," said Simon Smith, chief economist at FXPro. "After the
ECB introduced its forward guidance, tapering expectations
increased and the data improved, undermining it ... so (the Fed
move) gives more weight to pledges to keep rates low."
The Fed may have created other challenges for Draghi. A
rising euro/dollar rate, last at its highest since
February at 1.3568, could choke recovery by hurting exporters.
"Whatever they (the ECB) say now is a lot more credible
because markets won't put it in the context of Fed tapering,"
said Abhishek Singharia, European rate strategist at Deutsche
Bank. "(But) one will have to see what's happening with the FX
rate because if the (euro/dollar) is quickly approaching 1.40
they might have to do something about it."
RATE HIKES PUSHED BACK
One common way of calculating rate hike expectations assumes
that by the time the ECB raised rates, banking sector liquidity
- now ample due to the unlimited loans offered by the ECB at the
height of the crisis - would have normalised, no longer keeping
money market rates artificially low.
The overnight Eonia rate would then trade close to the
refinancing rate, currently 50 bps. Looking at the three-month
Eonia forward curve, the rate is expected to hit 75 bps in
September 2015, compared with April 2015 before the Fed meeting.
On the one-month Eonia curve, expectations of the first rate
hike have moved back to November 2015 from August 2015.
Assuming liquidity conditions remain the same for the
foreseeable future, expectations were pushed back to January
2015 from November 2014, according to Nordea estimates.
"The fact that we see a flattening of the curve loosens
monetary conditions by itself," FXPro's Smith said.