Goldman FX Now Really Hedging Bets, Sees Near-Term Weakness In EUR.... And USD
Goldman's Thomas Stolper has gotten expectation management down to an art. In his FX reco piece from today, the Goldman FX strategist is now bearish on pretty much everything. After all, who said a fiat world is zero sum - it can be whatever we want it to be...
More Front-Loaded EUR Weakness in the Near-term?
We are currently projecting a decline in EUR/$ to 1.22 over a 3 month horizon. The main reasons for this move are two-fold. First we have been highlighting for a few months that the return from the summer holiday period will likely see the re-emergence of fiscal/political concerns. Moreover, there is also anticipation of a sequential slowdown in the Euro-zone as growth slows to levels more consistent with trend demand growth.
On the first point, the post-summer period is important as many reform and consolidation programs enter the implementation stage which may bring home to the population what fiscal consolidation actually implies. A number of European countries have held strikes mainly in the public or related sectors. France saw a large-scale protest against pension reforms last week, widely seen as a success for the local trade unions. There is a strike planned for September 23rd and unions in a number of countries, including the UK, are calling for a Europe-wide strike on September 29th. In addition, government popularity in key Euro-zone countries continues to decline or stay at very low levels, including France, Spain and Germany.
At least at a Europe-wide level significant progress has been made on the policy front, notably via the creation of the EFSF and the involvement of the IMF. It should also be noted that many polls point to solid underlying support for reforms (a majority of the public supports - or at least recognises the necessity for – both pension reform in France and fiscal consolidation in the UK). But that doesn’t rule out a more negative reaction in the meantime. Amid public protests and declining poll ratings markets could well start to question governments’ resolve to push necessary macro and fiscal reforms through – a factor that could weigh on the EUR. .
Our growth forecasts are also consistent with only softening in the Euro exchange rate but only as a temporary phase. As we discussed in some detail in the FX Monthly, the chances are quite high that the macro data in Europe will continue to slow for a few months from extremely high sequential rates in the spring and summer. But we think the decline will be relatively limited and, relative to the market, we are more pessimistic about activity in the US than that in Europe.
Overall it appears quite possible that EUR/$ troughs notably earlier than the 3 month horizon. But given that this reflects our shortest regular forecasting horizon, we have decided to keep the numbers unchanged for now until we see indeed more evidence of stabilising momentum and reduced political tensions.
3. More USD Weakness Than Projected?
The second main risk to our current forecast path, i.e. even more USD weakness, needs less explanation, given we set out the case out in some detail in the FX Monthly. Bottom line is that we see bigger macroeconomic imbalances in the US, which are difficult to correct without involving notable USD weakness. This week brings the US balance of payments data for Q2 and the July TIC data, both of which are likely to highlight the fragility of the US external balance.
Markets may soon start to refocus on the “twin-deficits”, or faltering domestic demand and the need to reclaim manufacturing jobs lost to the rest of world in recent years. Even the reserve currency issue may become a talking point once again. And when combining our relative transatlantic views on monetary policy with comparisons of domestic and internal imbalances, upside risks to our longer dated EUR/$ forecasts in the high 1.30s emerge.
In order to embed such risks in our forecast path we first need to see evidence that the very latest moderate improvement in US data really is only temporary. The upcoming business surveys, in particular the ISM will be particularly important in that respect.
Presumably the currency that will win against all this is the AUD. Good luck with the Chinese bubble in that trade.