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Despite A Crumbling Europe, Goldman Sticks With Its 12 Month $1.55 EURUSD Forecast

Tyler Durden's picture




 

Goldman's Thomas Stolper joins Erik Nielsen with an updated, and painfully bullish, Euro forecast: "our baseline is that these risks will not escalate much further." As Stolper is the guy who has successfully top.ticked.every.single.move in FX, it is time to call the undertaker (the profit margins on a coffin the size of Europe will be sufficiently high no matter the input cost of lumber). Not surprisingly then Stolper follows up: "we believe EUR/$ remains very much on track for the projected trajectory of 1.40 in 3mths as well as 1.50 and 1.55 in 6 and 12 months." Recall that Stolper came out with his upward revised EURUSD forecast just before the pair topped out in the low 1.40s (which was shortly after he scrapped his 1.15 target just after the eurozone stopped its implosion last time around after the Stress Test lie and QE2 rumors started). In other words, we just doubled down on our bet that John Taylor is once again spot on. What is unsaid here is that Goldman expects the world to start pricing in QE3 imminently, and punish the USD: "one question we face very often is about the viability of Eurozone
growth with EUR/$ at 1.55. Our answer is that we really believe in broad
USD weakness." At the end of the day, as we have claimed for over a year, the key dynamic is between the race of USD and EUR to devaluation: on one hand via outright currency printing and on the other via a continental disintegration. The one thing that many are forgetting, is that the faster a European crisis unwinds, the bigger the European banks' funding needs for dollars due to record FX asset-liability mismatch (and now, due to the dollar serving as a carry funding currency). In other words, the worse Europe gets, the doubly-faster that the Fed will need to print reserves to keep the dollar low. All that is a long-winded way to say that we anticipate Stolper will revise his EURUSD forecast lower within a month, once Goldman's ex-prop-now-"client facing" desks have accumulated enough USD positions.

Eurozone Risks

The primary market focus currently is on Eurozone sovereign risks again. Our baseline is that these risks will not escalate much further. Specifically we believe that Spain will not need a bail-out as Francesco Garzarelli and Erik Nielsen have continued to highlight. Should this assumption turn out to be right, the EUR will likely strengthen again, otherwise we could see another sustained broad decline. In any case the current drop in EUR was not really a surprise. For example we highlighted since the summer in our FX research that the implementation phase of European fiscal tightening and further reforms will likely lead to renewed tensions and pressures on the Euro. Though to be fair, we initially thought this would materialise earlier.
 
At the latest forecast revisions in early October, we explicitly mentioned the risk of a temporary dip below 1.30 in EUR/$ on European sovereign issues and broader risk aversion. However, our baseline is that sovereign stress abates fairly quickly as otherwise our view of a relatively quick move back up may not materialise. And these fiscal worries are a powerful force, which even managed to temporarily overcome the risk correlations as we could see at the beginning of 2010, when stocks did well globally, the correlations in daily returns remained unchanged but where the sovereign concerns in Europe led to a strong temporary EUR down trend nevertheless.
 
A related risk is that fiscal tightening leads to much weaker growth performance in the Eurozone, but there again Germany acts as an anchor. With very little fiscal consolidation needed the overall fiscal tightening in the Eurozone will be far less than in the peripheral countries.
 
On the positive side, the latest round of PMIs suggests the core of the Eurozone may continue to show upside surprises, which over time would likely help alleviate sovereign stress and support the case for tighter ECB policy.
 
Overall, we believe EUR/$ remains very much on track for the projected trajectory of 1.40 in 3mths as well as  1.50  and 1.55 in 6 and 12 months. Of course, the biggest near term risk is further deepening of the Eurozone sovereign crisis and there is no doubt that further EUR/$ weakness would be the result. On the other hand, if things calm down again, opportunities for tactical long positions look increasingly good.
 
Finally, one question we face very often is about the viability of Eurozone growth with EUR/$ at 1.55. Our answer is that we really believe in broad USD weakness and hence the trade weighted appreciation of the EUR will be fairly limited if our forecasts are correct. 

And some more:

Our EUR/$ Baseline Forecast

Sometimes we find it useful to look at an ideal USD downside scenario before comparing our forecasts with this benchmark. This approach helps looking beyond all the short term factors dominating the headlines and to cut out some market noise.
 
Starting with continued strong correlations to risky assets, it is pretty clear that the USD tends to weaken when risky assets perform well and vice versa. This in turn suggests that USD weakness requires a clearly positive outlook for cyclical assets. One of the reasons why this correlations still holds in our view is that a large number of foreign investors in US equities are currency hedged, whereas US investors in foreign stocks rather tend to be unhedged. As a result a global risky asset rally tends to translate into asymmetric flows from foreign investors who end up being under hedged and need to sell more USD against their home currency. A positive global decoupling scenario with persistent US imbalances is pretty close to such a weak USD scenario from a risk correlation point of view.
 
The hedging asymmetries also suggest that a scenario where the US is clearly in the process of adjusting the structural imbalances would ultimately be USD positive as equity investors may start reducing their hedging asymmetries. This in turn would lead to sizable USD buying.
 
Finally, looking at the policy mix, tighter fiscal and easier monetary policy in the US than in most other countries would also help reduce support for the USD.
 
Our current macro forecasts pretty much tick all the boxes. We expect a continued global recovery with still persistent imbalances in the US and easier monetary policy by the Fed than in most other places. On the basis of this global view USD weakness remains the most likely trend to dominate FX markets. As part of a trade weighted Dollar decline we would certainly expect the Euro to join in. And in fact, many of the macro factors in the US seem to be the other way round in the Eurozone, including tighter monetary policy and a positive risk correlation for the currency.

 

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Thu, 11/25/2010 - 12:49 | 754685 masterinchancery
masterinchancery's picture

Wow, I didn't think delusions got that massive.

Thu, 11/25/2010 - 14:13 | 754809 Double down
Double down's picture

And the cool thing is that it does not matter if they are right.

Thu, 11/25/2010 - 20:35 | 755238 Careless Whisper
Careless Whisper's picture

i think it's outrageous that zerohedge continues to publish bullshit from goldman as if they have some legitimacy. they are a hedge fund, plain and simple, and i think they would screw over anyone they could, to make money. that's what they do, isn't it?

Fri, 11/26/2010 - 01:17 | 755493 Calvin Jones an...
Calvin Jones and the 13th Apostle's picture

I don't think you understand.  If ZH is saying that Goldman is saying to go long the Euro, ZH's point is that you should short it.  Basically to do the opposite of whatever Goldman recommends, since that is likely exactly what they are doing.  They aren't adverse to fucking their clients in the ass to make money, after all.

Thu, 11/25/2010 - 12:50 | 754686 trav7777
trav7777's picture

Rut roh Raggy

Thu, 11/25/2010 - 12:52 | 754690 irieblue
irieblue's picture

Tyler, you need  a special Goldman analList for these MoFo's that make these counter calls 6 months prior to their collapse. Who in their right mind listens to Goldman these days?

Thu, 11/25/2010 - 13:01 | 754705 doomandbloom
doomandbloom's picture

The Ben Bernank

Thu, 11/25/2010 - 13:16 | 754725 MountainHawk
MountainHawk's picture

+1

Thu, 11/25/2010 - 13:34 | 754759 Prof Gulliver
Prof Gulliver's picture

The Ben Bernank is not in his right mind.

Thu, 11/25/2010 - 13:00 | 754704 Tic tock
Tic tock's picture

So there are US investors..who what, haven't yet heard that there are other currencies apart from the dollar?...D'ya think he means the Bernanke?

Thu, 11/25/2010 - 13:03 | 754709 gwar5
gwar5's picture

"You can't be Serious!" --John McEnroe

Fri, 11/26/2010 - 02:34 | 755536 Howard_Beale
Howard_Beale's picture

Correction: "You cannot be serious"--the man did not use contractions.

Thu, 11/25/2010 - 13:05 | 754710 plocequ1
plocequ1's picture

This is fucking bad. Im taking the Jeremiah Johnson route. Ride due west as the sun sets. Turn left at the Rocky Mountains.

Thu, 11/25/2010 - 13:05 | 754711 breezer1
breezer1's picture

for all those new to ZH and who haven't secured physical gold/silver yet please feel free to panic buy now. 

Thu, 11/25/2010 - 13:08 | 754713 Byte Me
Byte Me's picture

However, our baseline is that sovereign stress abates fairly quickly as otherwise our view of a relatively quick move back up may not materialise.

 

That's a major, major caveat not currently likely in s or m/t.

Thu, 11/25/2010 - 13:08 | 754714 AssFire
AssFire's picture

1.20  in two months.

Thu, 11/25/2010 - 13:11 | 754718 DonutBoy
DonutBoy's picture

Excellent!  Short the EUR!  and Goldman gives me this for Thanksgiving, that is so sweet of them.

Thu, 11/25/2010 - 13:25 | 754745 Dagny Taggart
Dagny Taggart's picture

Perhaps someone at the Goldman Sachs knows that QE2.5 may be mostly a Spain (IMF) bailout? It would be one way the Euro would suck less than the USD, no? Does the Fed have an incentive to save or kill the ECB? The method would just be a matter of semantics. It fits the extend and pretend MO to keep them all limping along. Not that anyone at the Goldman Sachs would ever involve themselves in matters of leveraged foreign debt, being that it is still an American commercial bank.

Thu, 11/25/2010 - 13:31 | 754754 Amsterdammer
Amsterdammer's picture

However bad the situation in Europe

is, except for 'posterboy'Germany,

oQE1 was a flop, QE2 if you look

at the projections of the FOMC minutes

wwill do close to nothing for the spurring

of the U.S recovery, Treasury yields are standing in the

way of Bernakenstein's plans, and the underlying

'debasement'of the $ could well be gunned

down by the current Congress or the

upcoming one. No one seems to realize

that the scope of QE2 vs. tax incomes ( estimated FY2010 )

at 890 billion $. Pray the guy resings or gets shot down

( per your insightful post on the FED sociopaths )

-seems the only way to stop him-if he wants

to 'kick the can' and do QE3

Thu, 11/25/2010 - 13:35 | 754762 MeTarzanUjane
MeTarzanUjane's picture

Thanksgiving at Lloyds house:

http://oi55.tinypic.com/xndamf.jpg

Thu, 11/25/2010 - 14:10 | 754806 AccreditedEYE
AccreditedEYE's picture

Yee ha, dollar long! May be a good Christmas after all... (only if I can book profits and convert to physical in time. lol)

Thu, 11/25/2010 - 14:23 | 754830 Die Weiße Rose
Die Weiße Rose's picture

for those still in denial...

It will take some time to sink in that Europe's plan is the only way to go,

and that the USA will sooner rather than later will be dragged down

kicking and screaming, down that dreaded path of Austerity.

This will start to sink in soon when taxes go up,cost of living will rise,

and quantitative easing will cause stagflation, with the only real industry left

in the US being "financial services" with the Fed madly buying and selling their own national Debt of 13.7 Trillion or so with a yearly Interest bill of 414 billion and rising!

There is NO OTHER WAY OUT - then to cut SPENDING and cut the US fiscal budget Deficit !

There will probably be a VAT of some kind, taxes will go up in some form,

CPI, cost of Living and Inflation will rise and Austerity will be the only way out.

Still, most Americans are in denial and that is why the spotlight is on Europe and Germany,

who are wise enough to take their bitter medicine.

Soon it will be time to realize that the US fiscal budget is totally unsustainable

and Bond market will alert investors and speculators to that fact soon enough!

Until then the US will continue to live in self-inflicted economical dilution

and self induced destructing Amnesia.

Thu, 11/25/2010 - 14:34 | 754850 SwingForce
SwingForce's picture

Black Friday retail shopping being the most obvious statement of denial and/or insanity.

Thu, 11/25/2010 - 15:03 | 754907 snowball777
snowball777's picture

Or AfPak.

Thu, 11/25/2010 - 14:48 | 754878 carbonmutant
carbonmutant's picture

I heard oil was going to $200 a barrel a couple of years ago....

Thu, 11/25/2010 - 14:57 | 754897 Money_for_Nothing
Money_for_Nothing's picture

Austerity in the US (government) means domestic manufacturing starts back up. Because no deficit means very little external trade. That is why the globalist are fighting the tea party people. High gasoline prices have the same effect. Cheap energy is required for globalism. If you believe in peak oil then forget global trade unless something like low cost fusion energy becomes viable.

Thu, 11/25/2010 - 15:36 | 754949 edotabin
edotabin's picture

What I'm not following is the constant flow of articles contradicting themselves.

Dollar is dead, Euro will break up, Spain is next, Bernanke is nuts, Jp Morgan this and Goldman that........... it doesn't end.

Given this constant contradiction, it is natural for those here to say "physical" as currencies will wind up in the dumpster. Yet some  form of currency is needed. What if the Bancor is introduced and it is only 30 Bancors for an ounce of gold?

On the other hand, I understand the austerity but it too has a tipping point.  You cannot bring an economy to a complete halt by firing everyone and raising all taxes. It becomes counterproductive at some point as there is no wealth to tax.

Anyway, maybe someone's got this figured out.  Any pointers welcome.

 

 

Fri, 11/26/2010 - 00:37 | 755464 RockyRacoon
RockyRacoon's picture

What if the Bancor is introduced and it is only 30 Bancors for an ounce of gold?

Whaddaya mean "only" 30?  That could be a lot! 

Bread only 6 milibancors.  Milk 8 milibancors/gal.  Yipee!

Fri, 11/26/2010 - 15:16 | 756124 edotabin
edotabin's picture

I suppose what I was eluding to is that with the introduction of a new currency, they will "tell" us that confidence has been restored.

In order for this to happen, this new currency will have to be quite strong, resulting in a severe gold/silver takedown. Granted, it is fabricated

but it doesn't change the fact that this new currency will be stronger against the metals than what the dollar/euro are today.

So whether it is 30 Bancors, 20 Globos, or 5 Galaxies is irrelevant.

Maybe I'm just asking the "magic bullet" question and those who know the answer aren't gonna bother with me and those who don't will just "junk"

this or start screaming gold gold gold gold.

Thu, 11/25/2010 - 15:39 | 754951 Akrunner907
Akrunner907's picture

It is nothing more than a recognition of the ongoing race to the bottom for the dollar/euro.

Thu, 11/25/2010 - 18:02 | 755139 scratch_and_sniff
scratch_and_sniff's picture

These people are obviously employed for their stupidity.

Thu, 11/25/2010 - 19:04 | 755176 Akrunner907
Akrunner907's picture

No, they say or tell you stuff and then bet against what they said.  Talking credit default anlaysis to the Nth level.

Thu, 11/25/2010 - 19:53 | 755201 TheProphet
TheProphet's picture

No kidding, when I read this the first thing that came to mind: a research note from Goldman pumping up MCI Worldcom when it was at $100.

Thu, 11/25/2010 - 21:55 | 755293 Grand Supercycle
Grand Supercycle's picture

My long term indicators continue to warn of serious weakness for the EURO and strength for the Dollar.

http://stockmarket618.wordpress.com

Thu, 11/25/2010 - 22:18 | 755316 Minion
Minion's picture

Long term trend up, massive, well defined three wave primary from 2006 to 2008.5 then an ABC whipsaw since then......

Dunno, grand.  Elliot wave can conclude only one thing: it's already started the next leg up.  The past 6 months are pretty clear.......

(PRECHTER does not agree with this......)

:D

*edit: the fundamentals are clear:  Europe is going for austerity or bust.  I don't think austerity means a weakening euro, unless the whole train comes off the track.  I know the ZH crowd likes economic carnage, but I just don't see this outcome as very likely.  They've been gunning for a unified Europe for over 40 years.

Thu, 11/25/2010 - 22:30 | 755324 Orly
Orly's picture

For a clue, watch the long bottoming trendine on the EURUSD Daily.  The pair is about to jump.  Maybe fifteen pips to go.

USDJPY in the tanker.

Thu, 11/25/2010 - 22:38 | 755333 Minion
Minion's picture

Yes the 200 day MA is near.  It's also directly on the 20 month MA, however I'm expecting it to hit some H/S @ 1.32.  Second pullback rarely goes much beyond first peak, in a 5 wave primary move. 

Unless it's an invalid forecasting method.  :D  Still testing.

Thu, 11/25/2010 - 22:47 | 755344 Orly
Orly's picture

It is bouncing now off of a very strong support line at this Fibo-level (1.335).  Due to "extraneous" factors (USD printing, Euro stabilising, etc...), the pair may reach the fifty percent retracement from this move down, which is near the 1.352 level.  It may not get there but I think it is going to try real hard.

Good luck!

Thu, 11/25/2010 - 22:52 | 755354 Minion
Minion's picture

How very interesting, the fib 61.8 level is right under it.  Now I see what you were getting at when you suggested I put away the calculator.  :D

I actually sold my TI86 after getting out.  You don't need them on the job.

Fri, 11/26/2010 - 00:05 | 755434 Orly
Orly's picture

It would be funny if the trend-lines and Fibonacci retracements converged at the spot of a major move...except it happens a lot.  :D

Yes, put away the calculator and use Fibonacci retraces.  The Japanese swear by them and the British know they do; the Americans say, hey three can play at that game, how about you, Euro?

I don't know whether this is all some self-fulfilling prophecy in action or there are actual forces at work in the universe that we wee humans cannot understand.  I tend to believe the latter.  These lines are mathematical magic.

Take them off the longer time frames- Daily and Weekly.  To see Fibo lines inside of two major Fibo lines, just redraw from line to line and now you have inside Fib retraces.

Just check it out.  I think you'll be amazed at how trades, especially currencies, tend to cluster and bounce around these lines.  The line from 1985 is still valid today, all these years later.  It really is amazing.

Fri, 11/26/2010 - 06:33 | 755612 Paul Thomason
Paul Thomason's picture

I'd have to say I don't agree with this forecast.  Short term and long term it looks a bit delicate.  Having said that on the medium term charts it is still sucking air, but if that goes I don't like it's chances of seeing $1.55 any time soon.  

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