Goldman's Stolper Sets 'New' Four-Year FX Plan
This morning, Goldman announced their 10 Themes for the year. The succinct summation of them (which we will discuss later in more depth) is that: there'll be some volatility on the way but in the end it will all be unicorns and faeries (our translation). In line with these global forecasts, everyone's favorite contrarian FX strategist updated his short- and long-term FX projections. So presented with little comment are Tom Stolper's guide to stop-hunting and fading the crowd. High conviction ideas such as AUD weakness, JPY stability, and a 1.40 EURUSD stood out to us.
Via Goldman Sachs:
Long-term forecasts to 2016. The most significant change in the way we present our forecasts is that we have dropped our 5-year forecasts and instead have a full annual path out to 2016. For the multi-year projections we typically started with our GSDEER 'fair value' model, and in many crosses clear signs of convergence to fair value are visible. For example, in the EUR and the JPY we expect relative weakness in 2015 and 2016. Even the trade-weighted Dollar is expected to re-appreciate towards the end of the forecasting horizon. This kind of projection has been a feature of our previous 5-year forecasts, too. However, the more detailed path gives additional information about the timing and speed of the expected mean-reversion towards fair value. It is also clear that we expect a number of currencies to remain substantially misaligned, typically on the basis of country-specific factors.
Short-term forecasts for 2013. Our new 12-month forecasts coincide with the end-of-year projection for 2013. In between, we provide the usual 3- and 6-month forecasts. These have generally not changed much compared with the previously published path, although there are some differences.
Changed View on the JPY. The most significant forecast change is a more moderate view on the JPY. Instead of gradual further JPY appreciation, we are now expecting broad stability at $/JPY 80 over the foreseeable future. We now think that policy makers will prevent the JPY from becoming much stronger. That said, we also fail to see a catalyst for a much weaker Yen and hence believe that $/JPY has moved too far in the latest move higher above 82.
Strong views. In terms of forecasts that stand out relative to current spot, we would highlight the AUD and the TRY, where we see further substantial FX weakness, including against the USD. Otherwise, our continued USD bearish stance also stands out, in particular relative to consensus. Much of this Dollar weakness is linked to the expectation of further Asian currency strength. On the EUR we continue to expect a move back up to EUR/$1.40. Many investors remain substantially under-exposed to the EUR and following the ECB’s OMT announcement we think a gradual reassessment of tail risk scenarios will support the Euro over time and correct some of the underperformance in recent years. The Euro move would likely contribute to broad USD weakness, with many other European currencies typically following EUR/$.
Near-term risks. The macro outlook for the immediate future remains quite unclear, as extensively discussed in other publications released today, mainly linked to the risk of a 'fiscal cliff' in the US. We see scope for notable asset price volatility and this could temporarily weaken some of the more cyclically exposed currencies vis-à-vis the Dollar. Our 3-month forecasts do reflect this to some extent.
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