Money markets bets on further ecb easing creep into market

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* Euribor futures higher across contracts* Some possibility of rate cut priced in for June-analyst* Eonia forwards points to lower overnight ratesBy Ana Nicolaci da CostaLONDON, April 26 Money markets appear to be expecting that the European Central Bank's next move will be to ease monetary policy again rather than head for the exit from its ultra-loose monetary policy. On Thursday, Euribor futures <0#FEI:> were higher across contracts, implying lower bank-to-bank rates down the line, which would reflect lower ECB interest rates, while overnight Eonia has also been grinding lower."You have got countries in Europe now officially in recession, so the market is starting to look for a rate cut," said a trader.

"A lot of upside option plays on Euribor futures have been bought since Monday, basically looking for a rate cut coming down the line."Euribor futures were up 3.5 basis points at 99.40 on the September contract on Thursday, implying a rate of 0.60 percent at that time. Three-month Euribor rates were at 0.72 percent. They have been expected to stabilise around 0.63 percent - the record lows hit in 2010 - in order to keep offering a premium over overnight rates. Eonia rates last traded at 0.34 percent and its downside was seen as limited given that the ECB's deposit facility offers a rate of 0.25 percent.

A Reuters poll showed on Wednesday that economists expect the ECB would not change interest rates, currently at 1 percent, in either direction until 2014 at the earliest. It also showed that they expect the bank to restart its bond-buying programme within the next three months. ECB President Mario Draghi on Wednesday called for a "growth compact" but put the onus on euro zone governments to shape up their economies and gave no indication that the ECB was poised to provide more support to countries or banks. Even so, Alessandro Giansanti, strategist at ING, said Euribor futures were supported by Draghi's comments. Analysts are increasingly worried about growth in the euro zone, and data this week showing Germany's manufacturing sector unexpectedly shrank at the fastest pace in nearly three years in April suggested that the crisis was beginning to take its toll on the region's core economies.

"After the speech by Draghi yesterday when he focused more on growth ... I think the market started to think that maybe another rate cut is not really out of (the question) and that's why we have a rally in the Euribor futures," said Giansanti. He said the market sees a 40 percent probability of a 25 bps rate cut in June. In order for short-term interest rates to fall much further the ECB would have to reduce the ECB's deposit rate and this is a possibility that markets are not ruling out, analysts said. Benjamin Schroeder, strategist at Commerzbank said such expectations are beginning to seep through Eonia forwards , a reflection of where the market expects those rates to trade at down the line."You should see that by September they have dropped to even below the 0.30 (percent) level. That's about 4 bps from our current level, and I think this can't be down to solely liquidity aspects like excess reserves weighing on the Eonia fixings," Schroeder said."I think there is some speculation that the ECB will actually cut the deposit facility rate some way further down the road."