Goldman's Latest EURUSD Outlook

Tyler Durden's picture

Goldman's Themistoklis Fiotakis has released the firm's latest EURUSD outlook. And while the most amusing part of the note has nothing to do with FX but with the firm's ongoing attempt to bankrupt clients by holding Greek bonds ("Stay long 30-yr Greek GGBs, opened at 54c (ask) on 03 September
2010, for a target of 65c and a stop on a close below 50c, now at 53.6c
(bid).") we will cut to the chase: Goldman is still calling for 1.50 on the EURUSD, driven by dollar weakness and increasing European interest rates (which will surely succeed in bringing the EUR to infinity, and then promptly lead to the destruction of the currency when half the European continent files for bankruptcy). But that is irrelevant: what is important is that due to some regression model thingy, the EUR has room to run, or in Goldmanese: "Given that this simple model has an R-squared of 74%, a significantly
high reading for a regression in changes, it is safe to argue that our
factor analysis captures the largest part of the EUR variation."

1. Overview

Despite the S&P closing flat after a mostly negative session yesterday, Asian equities traded mostly on a negative tone overnight, while European equities are trading more mixed this morning. The EUR continues to hover at levels slightly below 1.45, while US 5yr treasuries are trading around 2.19, a few basis points lower than yesterday.

On the data side, Chinese GDP came in very close to our forecasts at 9.7% yoy. Broader activity data appear to indicate that domestic activity has recently gained some momentum as money and credit growth have also loosened in recent months. At the same time, CPI accelerated at 5.4%yoy from 4.9% in February. The CNY continues to appreciate at a faster pace, benefiting our trade recommendations. India CPI came in at 9% yoy, beating consensus expectations of 8.4% and leading to a sell-off in local fixed income.

Overnight, in our publications, we reiterated our near-term cautiousness on commodities and, along similar lines, we discussed our asset allocation views in the latest GOAL publication. In our latest European Weekly Analyst, we examined the strength of the European recovery: although the ECB looks set to continue raising rates this year by 50bps, we expect the sizeable output gap combined with declining headline pressures to slow the pace of tightening in 2012. We see the ECB’s refi rate reaching 2.5% by end-2012.

In terms of data today, keep an eye on the composition of capital inflows into the US via the TIC data release. The empire manufacturing survey will also be interesting to watch. The University of Michigan consumer confidence survey, however, will be the key release of the day; it will be interesting to see if higher oil prices have further pushed down consumer confidence and boosted inflation expectations.

2. The EUR Rally; Primarily a Reflection of Dollar Weakness…

Since its trough on January 7th at 1.29, the EUR/$ has appreciated by 11.4%. This rally has been in line with our broad views on the USD and the EUR. In addition we have recommended two long EUR/$ trades throughout the course of the rally, both profitable. The most recent EUR/$ trading recommendation is still live and we are currently trading 3.6% short of our target level of 1.50.

Understanding the key drivers of the EUR move will help us assess the tactical risks around it as well. For that reason we use our “FX Betas” framework to break down the recent EUR strength to the macro factors that have driven it. FX Betas are simple linear regressions of weekly changes in exchange rates (against the USD) against weekly changes in domestic front end rates (2y rates), US 2yr rates, dollar direction (using the broad USD TWI), positioning (using short term risk reversals as a risk proxy) , and risk sentiment (as captured by the VIX). Cross asset relationships with currencies are typically unstable; over time, sensitivities of currencies to other assets tend to change. So our framework is trying to capture the most recent market sensitivities. For that reason, these regressions are run over a rolling sample of 12 months to reflect current market sensitivities. Every month we present the updated coefficients in our FX monthly publication.

According to this simple analysis, the EUR appreciation year-to-date has been, by and large, a dollar move. Out of the 15 big figures that the EUR has risen by since the January 7th lows, 9 can be attributed to the shift in the USD TWI. This confirms our focus on the dollar direction as the key macro theme in FX space and the notion that the EUR tends to trade as the “anti-dollar” more often than not, mirroring to a large extent moves in the USD TWI.

As discussed in the most recent FX monthly publication, structurally we remain dollar bearish (and EUR bullish as a consequence) as long as the three key macro pillars of our view remain in place; i.e. as long as the FED maintains its accommodative policy stance relative to the rest of the world, the US trade deficit remains wide and the financing of the external deficit remains insufficient.

That said, in the near term, the risk is that softer price action in risky assets may trigger dollar strength. The prevailing correlations continue to indicate that the dollar tends to underperform at times of strong price action in risky assets. And as Noah Weisberger and Kamakshya Trivedi have pointed out, over the last few trading sessions, the cyclical sectors of the US equity markets have underperformed, indicating possible concerns over near-term growth trends within the equity market.

3. …But Also Driven by Higher EUR Interest Rate Expectations.

The second most important driver of the EUR/$ since its January lows has been the re-pricing of front end European interest rates. The shift in 2yr EUR swap rates accounts for about 6 big figures of the 15bps EUR rally. Together with dollar direction they account for the EUR move in full!

Of the 86bps move in 2yr EUR rates, 25bp reflects an actual ECB hike and the rest reflects a shift in policy rate expectations towards earlier hikes in the remainder of the year. Our view remains that the ECB will hike two more times this year, confirming the shift in expectations. However, as Francesco Garzarelli and Mike Vaknin have recently argued, the market is now pricing in our views to a very significant extent. In fact, we continue to recommend receiving EUR rates (vs CHF rates) as we see less space for European rates to go significantly higher from here.

In our framework, this means that EUR/$ will likely receive less support from European rates going forward. And if European rates were to decline, such a shift could prove to be a source of vulnerability for the EUR/$. Watching Global and European data and monitoring the market’s growth expectations and inflation data will be key along those lines.

4. Speculative Positioning Has Probably Been Less Important of A EUR/$ Driver.

Interestingly, the other variables in our model are insignificant both in terms of statistical inference and in terms of actual contribution to the EUR/$ move. By itself, this is an interesting fact.

    * First, it implies that speculative positioning has not been a key driver of the EUR/$ move since January, at least as far as risk reversals can capture such positioning as a proxy.
    * Second, the impact of US rate shifts has been very small. This helps explain how both our long EUR/$ recommendation and our short US 5y rate recommendations appear to be working at the same time.
    * Third, the impact of risk sentiment on the EUR appears to be small. However, a significant chunk of this is captured by shifts in dollar direction as we argued earlier.

5. Still Room For the EUR/$ to Reflect A Declining Fiscal Risk Premium.

Given that this simple model has an R-squared of 74%, a significantly high reading for a regression in changes, it is safe to argue that our factor analysis captures the largest part of the EUR variation.

Intuitively, however, one factor not fully captured in our model is the decline in the fiscal risk premium on the EUR. In our commentary, we have highlighted this as one of the key catalysts for EUR strength. In early January, the EUR/$ exchange rate incorporated a significant premium associated with the European fiscal crisis. Given that spreads for Spain and Italy, the more systemically important countries in the Eurozone periphery, have contracted since, one would have expected the EUR to receive an extra boost from this. Interestingly, our analysis does not point to a strong outperformance of the EUR relative to the factors included over that time frame. It is possible that the increase in front-end interest rates is capturing this decline in systemic risk, with the decline in fiscal risks allowing the ECB to turn more hawkish. That said, in the near term, it may also be the case that the EUR has space to rise further as the associated risk premium declines.

6. Current Trading Views

The following trading ideas from the Global Markets Group reflect shorter-term views, which may differ from the longer-term ‘structural’ positions included in our ‘Top Trades’ list further below.

In FX:

1. Stay short $/CNY via 1-yr NDFs, opened at 6.7550 on 10 June 2010, and a trailing stop of 6.70 for the $/CNY spot rate, now at 6.5000.

2. Stay long EUR/TRY, opened at 2.1620 on 9 February 2011, with a target of 2.35 and a stop on a close below 2.09, now at 2.2011.

3. Stay long RUB against a basket of EUR (45%) and USD (55%), opened at 33.68 on 1 March 2011, with a target of 31.31 and a stop on a close above 34.71, now at 33.8991.

4. Stay long EUR/$, opened at 1.4085 on 18 March 2011, with a target of 1.50 and a stop on a close below 1.35, now at 1.4474.

5. Stay short $/MYR, opened at 3.066 on 31 March 2011, with a target of 2.90 and a stop on a close above 3.08, now at 3.0595.

6. Stay short $/PHP via 1-yr NDFs, opened at 43.11 on April 7 2011, with a target of 41.50 and a stop on a close above 44.50, now at 43.316.

On Rates:

1. Stay long 30-yr Greek GGBs, opened at 54c (ask) on 03 September 2010, for a target of 65c and a stop on a close below 50c, now at 53.6c (bid).

2. Stay long 10-yr Spanish Bonos vs. Italian BTPs, opened at 54bp on 25 February 2011, for a target of 0bp and a stop on a close above 80bp, now at 61.7bp.

3. Pay 5-yr Swiss swap rates vs Euroland, opened at -137bp on 4 March 2011, for a target of -100bp and a stop on a close below -152bp, now at -139.9bp.

4. Stay short 5-yr US Treasuries, opened at 1.936% on 18 March 2011, for a target of 2.50% and a stop on a close below 2.0%, now at 2.20%.

5. Pay 5-yr Korean swaps, opened at 4.04% on 21 March 2011, for a target of 4.40% and a stop on a close below 3.80%, now at 4.10%.

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Spitzer's picture

The Euro is a better currency then the dollar. It is taking the place as the least worse fiat

Long-John-Silver's picture

That's sort of like saying it's better to go over the cliff in a BMW than a Chevy.

narapoiddyslexia's picture

Or the least ugly whore... who might or might not knife you in your sleep. But, still, I can see where more responsible Europeans might salvage their fiat.

Spitzer's picture

Yes, the Euro is the least worst fiat, not the dollar.

Ahmeexnal's picture


CHF is the best choice. Specially pre-1967 coinage.

Spitzer's picture

ah yes that is the conventional wisdom and we all know how that ends.

Who doesn't know that the Euro is dommed ?

The Euro was designed to take over the dollar, that is why it exists. This is an easy fight for Trichet. He knows that his opponenent is a clueless keynesian retard. Notice how this morning Germany is talking about resructuring Greek debt ? Rate hikes and debt restructuring talk. The ECB is so much further ahead of the Fed that is no contest anymore.


barkingbill's picture

id rather go over the cliff in a bmw actually. 

barkingbill's picture

if you are bearish the dollar, then why not be long the euro? i am. 

FOC 1183's picture

"Cross asset relationships with currencies are typically unstable; over time, sensitivities of currencies to other assets tend to change. So our framework is trying to capture the most recent market sensitivities. For that reason, these regressions are run over a rolling sample of 12 months to reflect current market sensitivities" the time r-squared reaches 74%, the correlations (and thus model itself) are about to break down

alien-IQ's picture

I once used this same mathematical model to forecast the likelihood of Jessica Alba showing up at my door, naked, and immediately dropping to her knees and blowing me. The results were quite encouraging. It was a 92% probability. So I've got that going for me.

I am, however, still waiting for her to arrive...Any day now, though. For sure...Any day now.

narapoiddyslexia's picture

She's blowing Ben. That's what makes all those little sheets of green linen fly out his ass. And that's why he's always smiling nervously. You don't ever see a full-frontal picture of Ben standing, do you? 

alien-IQ's picture

I am now, more than ever, certain that Goldman has a Psychobabble Department that actually writes all this shit.

Urban Redneck's picture

They are positioning for a no-bid contract from the DoD to help them with their Powerpoints.

jkruffin's picture

You know what the worst part of it is?  It's not that Goldman is nothing more than a thief and crook organization, it's the fact that people out there still take their advice and follow what they say.  After all they did screwing people from 2004-2008 and beyond,  people still do business with these crooks.  Unbelievable!!!!!!!

Dick Darlington's picture

And those aggressively rising yields on Spanish govies plus the rest of the insolvent periphery is extremely bullish for EUR. Do these guys really get paid for this spin? Ah, of course they do, coz they always take the opposite side of the trades they recommend to their clients.

Portugal's picture

"Goldman is still calling for 1.50 on the EURUSD, driven by dollar weakness and increasing European interest rates (which will surely succeed in bringing the EUR to infinity, and then promptly lead to the destruction of the currency when half the European continent files for bankruptcy)" ...but when that happens, where will the USD be ?

bigargon's picture

Go Long Anal lubricant and Preparation H as we bend you over again.

SheepDog-One's picture

I didnt know it took highly placed anal-cysts in GS to do commentary on the drunken hobo currencies staggering down the alley arm in arm.

pendragon's picture

the amazing thing is that all these "smart" money managers have bought into this crap. the european periphery is a basket case. even john r taylor seems be be long the euro these days. the herd of sheep is charging off the cliff

SheepDog-One's picture

I sat at lunch Saturday with 3 bankaz at an ex-Bennigans for lunch, now its called Flatirons for anyone wondering, anyway my dad and my 2 brothers all bankers 'money managers' are completely clueless. One of them heads up a loan dept, believe me theyre all clueless as the avg sheeple youd see in any Walmart. 

pendragon's picture

it is as much the short sighted-ness as the clueless-ness. no-one really believes that peripheral europe can withstand higher rates but the idiots are still happy to pick up the pennies in front of the steam roller. someone else's money i guess

ZeroPower's picture

There's a difference between clueless retail bankers, and the true financier ballers.

pendragon's picture

the level of criminality?

falak pema's picture

dead on. One financial retail banker I know wants to bury alive the trading arm of his own bank. That's how bad the intra bank hatred lies. Blood on the walls...except that its the traders who make all the money even they laugh at the rants of their retail colleagues who have no idea what's up ahead, and take their trader bonuses home to spend.

ZeroPower's picture

"wants to bury [them] alive" = do you figure he's jealous he's stuck in the shitty retail arm? Traders make the money, the invesment bankers, asset managers, pretty much any non teller or other retail banker provides some value added to the bank. Why do we still need tellers? Dont even senior citizens know how to withdraw funds from the ATM, or do e-payments? 

falak pema's picture

wants to Bury them 'cos he feels that sooner or later the retail arm, selling to private rich clients (he is a private client 'hyper rich' elite, banker) who do due diligence, will be pulled down when their trading arm will ruin the bank. He admits the shadow banking risk is ENORMOUS!

SheepDog-One's picture

I think even most of the bigwigs are pretty much clueless brainwashed yes men.

Global Hunter's picture

I agree SheepDog, this is what they learned in Finance undergrad, then MBA then as juniors in their banks or brokerages.  Its similar to nuclear industry experts saying "ah well it was the tsunami that caused the meltdowns it can never happen again." 

This stuff was not covered in their textbooks and most educated people have lost the power of intuition and their sense of logic is askew. 

SheepDog-One's picture

Thats right, hardly anyone now has any ability to think past what the herd thinks, what theyre told to think by talking heads on TV, even the big bankers think what theyre told to think by a director.

ZeroPower's picture

Sure, brainwashed to the fact that theyre (mostly) loyal to their firm. Whats good for firm XYZ is thus good for me, so i will be brainwashed to do/say whatever is beneficial to this end.

Means to an end isn't always right, but i propose the means to an end isn't right in many other professional instances.

Cdad's picture

"...what is important is that due to some regression model thingy, the EUR has room to run..."

Huh?  Come again?  I knew I should have taken foreign language classes in high school.

Just like the criminal syndicate Wall Street banker on the BlowHorn [CNBC] just now, one of hundreds asked the same thing in the last two years, the question, "What is it going to bring investors back into the market?"  His answer:  paraphrasing, we think investors have come back.

In bizzaro world America, and especially if you are a member of the New American Marxist/Banker Party, if you say it, it is.  Never mind the facts.  If you got Ben Bernanke pumping up your trading account every single day, then investors have returned.

And also, because of regression model thingys, little Miss Euro the bimbo has room to run?  And this will bring down oil on continued dollar weakness, and metals too?  WTF?  Someone best check the fluoride levels in the drinking fountains over at Goldman Sachs.  I mean if you are going to ram the market up, fine...just say it.  But all this other stuff?

SheepDog-One's picture

'EUR has room to run'...apparently the highly placed colonic GS anal-cyst believes one of the currency hobos staggering down the alleyway is about to get a second wind and sprint out into the freeway traffic?

Cdad's picture

LOL!  You kill me, Dog.

And just now...oh good grief...Steve Liesman is literally trying to kill himself by drowning in a glass of his own kool aid.  He simply refuses to accept that inflation is rising even as his colleagues prepare an emergency intervention on his behalf.  Good grief, even M. Francis just pants'd the guy.

Someone earlier commented on Liesman being the suck up man...holy  I wonder if Ben Bernanke will announce an emergency rate hike just to save Steve's life?  If he drowns on set today, Bernanke is going to have to take responsibility for his death.

Steve!  Stop!

ZeroPower's picture

Liesman, man oh man.

Missing Jeff Macke or at least Santelli : Liesman rounds.

Jack Sheet's picture

Highest quality, Good-Housekeeping-seal-of-approval bullcrap.

carbonmutant's picture

Goldman must be buying Dollars...

Cdad's picture

Exactly.  I cannot wait for Goldman to change its mind on Monday morning about....EVERYTHING.  We thought the Euro had room to run...but it didn't...and we JUST LEARNED that half of Europe  Sorry.  Buy dollars.

Again, it is almost like they either think the entire nation is blind...or stupid.  I rather think the criminal syndicate is actually the retarded kid in the room.  Just look at the Lutnick puke from last night on Kudlow.  I really think these bankers are just dumb as rocks.  Someone prove me wrong, please.

SheepDog-One's picture

I believe even the big banksters are just drones who do as theyre told, and happy to do it as long as the free money keeps flowing. They ask no questions, and know NOTHING!

Leo Kolivakis's picture

''Themistoklis'' is Greek for Timmy! LOL!

Oh regional Indian's picture

At some point, all fiat must implode into worthlessness. When will that point come?

When war becomes WAR. And you can bet yoru bottom benny, WAR is around the corner, given that many wars are well underway. It's a classic pattern.

All this shamelessness that we see on display is due to inside knowledge that the great re-set is on it's merry way. As Gurdjieff said, the inexplicable tendency of humans for periodic, reciprocal destruction.

Most people and sheeple and institutions are just collateral damage.


SheepDog-One's picture

We'll soon see some 'Pearl Harbor event', like what kicked off WW2 big time after wars had been going on for a couple years already. We're about at that point to see it, and in this coming case like Pearl Harbor, they knew all about it ahead of time.

Ahmeexnal's picture


Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: 'Account overdrawn.'




AGoldhamster's picture

Unfortunately I have again to disagree - GS will again be right:

Just a matter of time. Latest within the next 6 weeks, but likely much earlier.

milanitaly's picture

2. Stay long 10-yr Spanish Bonos vs. Italian BTPs, opened at 54bp on 25 February 2011, for a target of 0bp and a stop on a close above 80bp, now at 61.7bp.

Are they crazy? Target 0bps!!! Spanish bonos 5,42% Italian BTP 4,73%

Do they want the italian default? Do they know that Spain will discover gold under Madrid?