This page has been archived and commenting is disabled.
Goldman Explains How It Can Be Long The Dollar AND Call For 2+ Years Of No Fed Fund Tightening
The biggest discrepancy coming out of Goldman these days is not the "conviction buy" external rating on all equities, even as the prop guys keep selling, but the conflicting opinion of a strong dollar coupled with expectations for two+ years of no Fed Fund rate increases. Conventional wisdom of course says that it has to be one or the other - can't have both. Apparently Goldman clients have voiced enough shock and awe with this position by the masters of the universe, that it has provoked the firm to come out with a clarification of how its trading desk could have been axed so wrong. Below is the proposed justification.
Many clients have asked how we can justify our forecast of Dollar strength on a 12-month horizon (EUR/$ 1.35) given that we now expect the Fed to remain on hold right through 2010 and 2011. The answer to this question is twofold. In terms of rate differentials, strong shorter-term correlations do exist between rate differentials and currencies to the extent that both reflect changes in the growth outlook. However, over longer horizons, these correlations tend to be very instable and often dominated by trends that point in opposite directions.
For example, there is no clear long-term link between the trade-weighted Dollar and the 2yr rate differential between the US and its key trading partners, as can be seen in the chart. In 2001/02 rates moved against the USD, while the USD strengthened. From 2003 to 2005 rates moved in favour of the USD but the Dollar weakened. And, finally, in 2008 the Dollar rallied strongly while rate differentials remained unchanged.
On the other hand, we have shown on several occasions in the past that capital flows do have a pretty robust impact on the USD. In that respect, it is critical to focus on the BBoP, which has not yet improved because the narrowing in the trade deficit has been offset by deteriorating portfolio flows so far. But once the BBoP improves, the Dollar will likely strengthen on a tradeweighted basis and this is not necessarily linked to Fed hikes. In particular, we can imagine a scenario where investors start to re-invest in the US on the basis of Dollar undervaluation, reduced US imbalances and early pockets of sustainable demand growth, when at the same time the Fed continues to worry about a high unemployment rate and keeps policy on hold.
We are not really sure when the BBoP will improve sufficiently to change the USD outlook. It certainly is too early now, and this is why our 3- and 6-month forecasts remain firmly Dollar-bearish across most major currencies. But towards the second half of next year, there could be a chance of improving capital inflows into the US, which is reflected in our 12-month forecasts. We often think of our 12-month forecast as a GSDEER reminder, while we wait for evidence of improvements in the notoriously volatile and difficult-to-predict capital flows.
It is also worth pointing out that correlations between short rates and FX are currently a lot weaker than correlations between equities and FX. Again, an indication that too much focus on rate differentials is not particularly useful when assessing the outlook for the Dollar.
Then again, before you rush out and buy dollars (which is probably not a bad idea but for other reasons), Goldman reminds us just how badly it has fared in its prediction of Yen levels.
We have been wrong with our 2009 $/JPY top trade. When we made the case for a long $/JPY position last July, we were aware of the high sensitivity of the Yen to US rates. Since about 2005, the rule of thumb was that $/JPY changes by about 1% for every 6bp move in US 2yr swap rates (see chart). We had discussed extensively that Japanese hedging activity was probably one of the key drivers of this relationship. We also made the case that $/JPY positioning had come back to more neutral levels after many months in long Dollar territory.
Based on this assessment, the likelihood of a rise in $/JPY appeared to have increased substantially. With the Fed on hold for an extended period, the risks of a move lower in US rates seemed fairly muted given that 2yr USTs only yielded a bit more than 1%. And with the Japanese data so weak, we did not expect markets would significantly increase long Yen positions. Moreover, long Yen risk had been a popular cross asset hedge during the 2008 carry unwind and post-Lehman slump—another reason not to expect a renewed increase in long Yen risk.
But things played out differently. First, we plainly misjudged the impact of the newly elected DPJ government on the JPY. We still think most of the perceived change in FX stance towards welcoming a stronger Yen was linked to teething problems on the communication side, but the new government allowed markets to think that a genuine shift may have happened. In response, speculative positioning shifted substantially into long Yen territory, contrary to our expectations. Second, US rates did decline further, troughing at only slightly more than 60bp for the 2yr US Swap rate after the Dubai news hit the tapes. While the decline in US rates during the second half of the year was small compared with the decline in the previous two years, it was sufficient to push $/JPY substantially lower.
Here are Goldman's tearsheets on the core currencies.
»
- 6545 reads
- Printer-friendly version
- Send to friend
- advertisements -
Deadhead--did you decide to get really fancy on us here and pull a fast one on Tyler? I swear, I did a comedy spit-out on the first chart alone.
As I see it there's only one way you can be long on the dollar without tightening, and that's "Massive Deflation".
I guess it sounds better to be "long dollar" than "positioning oneself for deflationary collapse".
Nope, Howard, I'm not smart enough to pull a fast one on these young little whippersnappers at ZH.
I am smart enough to know that having any sort of trust in anything that comes out of Goldman Sachs is a risky bet. And, therein lies one of the biggest problems Goldman Sachs has: they cannot be trusted and someday their paying customers will eventually leave. as will their investors.
I was laughing as hard at it as your Rahm to Hildy letter last night. And the more I looked at it the more convulated their charts and remarks became...it's really quite a lesson in bullshitting. I would go into a long diatribe as to why (and I sure hope they sent this to the BOJ so they can have a great laugh) but it will have to wait until later--company has arrived.
..... the JPY-EUR rate just snapped and dropped below what technicians would call another support level. If the market follows this lower, look for the DXY to surge.
think GS will give tyler credit?
just wanted to make sure i was smart enough to post this.
Congrats. Welcome. Now sign up, add a pic and click on a bunch of ads to generate some revenue. =)
I don't care what GoniffSachs publishes about anything. In my opinion they are a bunch of lyin' dirtbags. I don't believe them.
Why do you give them enough respect to publish their trash??? GOLDMAN SACHS IS A TAXPAYER BACKSTOPPED HEDGE FUND!!! You dig?
A strengthening dollar with no Fed rate increases? Sounds like they are accidentally predicting a deflationary collapse.
Also, if there is higher global demand for capital, then the 3 month treasury rate would rise. If the Fed didn't raise rates when that happened, then they would be leaving money on the table for their counterfeiting operation.
So I don't know what they are saying.
It don't really matter what they are saying because they aren't saying anything that is intended to help you.
No doubt. And what is your point?
Exactly....it's the greatest WTF in BS from GS ever. Give me another acronym...fast...oh, yeah--FUBAR.
Is this "real" financial gibberish or fake financial gibberish?
How about paying off the FDIC TLGP of $22 billion, Blankfein?
You are such a hypocrite, per your own words in the WSJ interview.
+1000!
Dollar strength is based on US Military strength...
No professor would ever teach such things, but we are the only country to use nuclear weapons against other countries and that puts a floor under the dollar.
Obama is trying to do everything he can to destroy the military, but when push comes to shove even Obama will use our strength to protect our world wide economic interests or he will be removed, one way or the other. Hopefully, by not being re-elected, but he could also be removed by scandal, etc.
We can have low rates and dollar strength in a relative fiat world against all other currencies. The argument against gold is more complicated but even against gold we can maintain some strength in a low rate environment.
The US military has not been doing that great.
Nukes really don't mean that much even if they are targeted and potentially effective, a la Russia. Their economy still collapsed and went through major turmoil.
In fact last year Robert Gates stated that America's nuclear deterrent could become unreliable in the face of "rogue" nations. While at the same time Russia and China are modernizing and updating their own facilities. US SLBMs can only go off when they are authorized to from a land base command in the US. It is not going to mean that much if those key bases are destroyed.
US aircraft carries could easily be taken out by china via super-sonic cruise missiles. The remaining jets would take on a targeted barrage of Chinese jets. As seen in Serbia, even the poorly maintained Migs performed better than expected. The serbs were even able to shoot down nato aircraft using obsolete soviet sam tech.
As for NATO, lol. You think the pacified euros are going to break their backs for you?, maybe in the face of the unindustrialized sand people of iraq and afghanistan. Not Russia or China.
Historically speaking the US military has been doing great. Low casualties and high success rate. But like in baseball and dating a high success rate still means you strike out alot. The military has lost the propaganda war in the US but has scared the rest of the world witless.
LOL The US military functions on propaganda. Considering the lousy performance of supposedly the state-of-the-art US planes against outdated russian equipment in kosovo, the US is more of a paper tiger than believed.
Anon... You've got a great idea. Might is right and we need to use the military to strengthen the dollar. Who should we attack and take their natural resources?
Iraq? Nope. They're too far away- although we are already there.
I think we ought to go after Canada. Commence 'Operation Human Shield'.
(I hoped to post a link to South Park. However when I found the video on YouTube it had been removed by Paramount due to copyright issues. Bastards.)
Switzerland. Gold, watches, chocolate and cheese. Oh, and they must have some awesome historical swag hidden there--Hitler's brain, JFK's, etc. I wanted to design a video game about busting into Swiss vaults a while back. Just imagine.
And we have troops right nearby. Just gotta watch out for those long rifles in the hills.
Yes, the only country that Hitler was scared to invade. Invading Switzerland would be like invading a mountainous Texas, or an Afghanistan that had a million expert marksman and a first-world air force.
We'd be better off snatching Canada.
Realistically though, you have to wonder if our sights are on Venezuela. Abundant oil, nearby, and a really irritating dictator who is genuinely anti-democratic. (No pot calling kettle black comments, please, the MSM would never pick up on that nor would J6P understand.)
I don't see what all the fuss is about.
On the one hand, "we don't see the Fed tightening for a long while" means BUY EQUITIES SUCKAZ!
On the other hand we have, "the dollar will remain strong" which means KEEP YOUR HANDS OFF MY GOLD SUCKAZ!
they don't trade nearly as well in markets they can't manipulate. which is why I do internationally traded commodities and currencies
Strong dollar because inflation will be a huge problem.
No Fed tightening because the economy will still be struggling. The Fed talks big about inflation but when push comes to shove, they dare not tighten and make it worse(in the short term).
GS having conviction buys on a lot of stocks makes sense as the market has been up for nine months. After the market truly tops, GS will talk about selling.
For Pete's sake people, GS is a business and they only see responsibility to themselves and their shareholders. They are doing the Darwinian thing of surviving over others. If they behaved in any other way, they would shirk their fiduciary responsibility.
As a citizen however, I can say that allowing GS to operate the way they do isn't good but only legislation can change that. We have to sleep in the bed we've made.
I don't see any inconsistency here.
pardon my ignorance...don't see the GS BS?...new to ZH...would like further explaination
Lloyd, Lloyd, Lloyd....come on now.
It's possible as long as there is sufficient fear of a market decline, although it would mean continued issuances in the short term range of the market, using the 30 year to continue as a fear indicator, although they'll discontinue it if it becomes problematic.
One factor they don't mention is how desperate the banks are to purchase Treasuries for cash delivery into their computers, especially if there are an increasing number of defaults. We'll see, *shrug*. The dollar rally is old, but until the Fed stops putting out every fire, there's no real reason for it to.
ok REAL quick-like ... they are NOT talking out both sides of their face. they are trying to be factual and legit while still 'making sense' to their readers while also not giving away anything of actual value towards traders or funny-mental anal-ysts.
goldman sucks, blah blah blah. yeah, great thought. and presidents shouldn't come from the ivy league. baseball players shouldn't come from the minor leagues. the analogues are endless simply bc its so damn simple. conflating a simple and obvious fact, GS in government, with opinion about those themselves and their policies, is just not mutually inclusive. one does not beget the other. and while the latter has been totally fjuc*** up (opinion) it does not mean that the former ought be banned of some such asinine statement.
the bottom line is this: only a fraction of 1% of traders / investors, let alone retail and the general public, can understand the 'issue(s)', so, you can either explain, with nuance, qualification etc. OR you can make sense in your writing and just make it lay.
prose aside, most cannot ever understand what is actually occurring, let alone numerically, quantifiably and then get hit upside the side with theoretical nuance and practical advice. it just can't be done. period. simple and understandable, OR, complex, nuanced and not interesting / understandable to the vast majority. again, whaddya want: real analysis or realmoney?
"salespeople, traders and other professionals" may take positions that are contrary to the opinions expressed in reports.'
http://www.zerohedge.com/article/goldmans-selective-trading-disclosure-legal-way-preferred-clients-front-run-market
Matt Taibbi on the Colbert Report tonight talking about Goldman Sachs and bubbles. Follows Sen. Bernie Sanders, he of the opposition to Bernanke, yesterday. I'd say social mood is changing.
I see the words Goldman and Sachs and I chuckle while looking for something to break in my hands. Crooks.
This proposition (Long The Dollar AND Call For 2+ Years Of No Fed Fund Tightening) is even more strange when you consider how much debt now exists in the world and especially the US.
Have the traditional rules of supply/demand been suddenly rewritten (interest rates are the lowest in 50 years in the face of huge gaping debt) or has some alien force just re-jiggered the law of credit gravity?
This proposition (Long The Dollar AND Call For 2+ Years Of No Fed Fund Tightening) is even more strange when you consider how much debt now exists in the world and especially the US. Have the traditional rules of supply/demand been suddenly rewritten (interest rates are the lowest in 50 years in the face of huge gaping debt) or has some alien force just re-jiggered the law of credit gravity?
The bear market rally shows signs of weakness.
We will make new equity lows according to my charts and my USD indicator has been giving BULLISH warnings for several months and I'm still expecting a dollar rally.
My indicators can identify trend changes before they occur.
They warned me of an impending market crash back in early *2007*
http://www.zerohedge.com/forum/market-outlook-0
to me this sounds quite sensible , all the anti - GS rants miss a few points in IMHO
- the US is in deflation - tick
- credit is a problem, destroying vast ammounts of dollars
- the unemployment / demographic situation and lack of savings will mean dollar repatriation
- there are few credible alternatives (JPY / GBP / EUR )
- everyone is short
-M2 is barely moving
All the GS bashing is getting pretty tiresome , how about some original thought ?
And M2 WON'T MOVE. It's stuck in M3's vortex.
If people don't stop this nonsense make a real economy that's not scam based and impliment it quickly you can count on a few things happening.
Everybody merging way past what any sane culture that understands why anti-trust is a good thing should let happen. Once the mergers are all complete you end up with huge behemoths that are black holes of financial and attention needs. We've already seen epic stupid with comcast merger. Throw in Intel merging with Nvidia. Japan creating 5 super industries that make dupiclates of every product known to man. And I am not shitting you it won't be 10 years before GM is rubbing contact opiates on the steering wheel during test drives to get you sign a contract right there. Limited man is good and can great things. Unlimited and EVERYBODY AND EVERYTHING TURNS TO CALIGULA.
GS bashing stops when the AIG $13 billion is repaid, the $22 billion of FDIC guaranteed debt is refinanced with non-US taxpayer backstopped debt, and GS is no longer a "financial holding company" with access to the Fed discount window. They are malignant, plotting, sneaky greedy fucks and should be universally reviled and treated as leprous pariahs.
How's that?
With apologies to innocent lepers everywhere.
GS is boring....can you take ur protest to another forum and we talk about the topic please???
Well, here's a thesis for you: through financial terror a whopping near-20% trading range has been established for the DXY, from 72 to 88. Without the Fed doing anything, more terror can jerk the index very high within a few weeks.
Just imagine the chaos in commodity markets. What a great trading environment! $850 gold anyone? Oh, wait, $1600 gold! How about both??? Be ready.
In my humble opinion people return to sniffing buttholes, er I mean following trends, at near-lightspeed no matter how fucked up things get. It is the same as always: greed, fear and ignorance.
Of course the dollar can surge without a Fed move. It just did within the past year. The catalyst is fear, AKA financial terror.
Did I miss anything?
Happy 'trading'....
What the hell is a BBoP?
(Basic) balance of payments.