Greg Smith's 15 minutes of fame has come and gone, but the muppet crushing at Goldman is only starting to ramp up, courtesy of the man who singlehandedly has made sure Goldman's FX prop trading team should be the most profitable one in the entire universe by simply doing the opposite of what Goldman's clients do. As a reminder, sent out at 5 pm yesterday, as we alerted our Twitter followers: "Go long EUR/CAD on further risk premium compression in the EUR and a more dovish BoC... We recommend going long EUR/CAD at a current level of 1.296 with an initial target of 1.37 and a stop on a London close below 1.26." Big Oops (see chart). Then again, after Stolper epic failure to Impala the muppets on his last EURUSD trade reco, it is great to see him back to 0.000 batting form.
Trade Update : Go long EUR/CAD on further risk premium compression in the EUR and a more dovish BoC
With the weekend’s Spanish regional elections out of the way, it is our expectation that Spain will apply for an EFSF/ESM program in the coming weeks. Once conditionality has been negotiated and the MoU signed, this will set the stage for the ECB’s OMT to go active, which could lead to further compression in the Euro zone risk premium. We traded compression in this risk premium with our long EUR/$ trade in August and September. We therefore see this long EUR recommendation in many ways as the second leg of that trade.
We recommend going long EUR/CAD for two reasons. First, the exact timing of the Spanish application remains uncertain (though this is a “when” and not an “if”). By going long EUR/CAD as opposed to long EUR/$ we are allowing for some uncertainty around when exactly Spain applies for a program. Second, and more importantly, we think the Bank of Canada will tomorrow drop its tightening bias, which was foreshadowed in Governor Carney’s speech last week in which he gave more neutral forward guidance. We think in conjunction with that change, the Bank of Canada will downgrade both its growth and inflation forecasts, for which there is ample room based on recent data. Given significant long CAD speculative positioning – our sentiment index in our weekly IMM email remains close to stretched long levels – we think there is room on the FX side for the market to price this shift.
We recommend going long EUR/CAD at a current level of 1.296 with an initial target of 1.37 and a stop on a London close below 1.26.