Goldman's Stolper Opines On The EUR, Says ECB Rate Cut Is A Buying Opportunity

Tyler Durden's picture

After briefly becoming the strongest currency in the world for 2013, yesterday's stunning inflation report out of the Eurozone has not only left the massively overblown European recovery story in tatters (but... but... those soaring PMIs, oh wait, John Paulson is investing in Greece - the "recovery" is indeed over), has sent the sellside penguins scrambling with the new conviction that the ECB now has no choice but to lower rates once again, either in November or in December. So with everyone confused, we were hoping that that perpetual contrarian bellwether Tom Stolper, who just came out with a report, may have some insight. And sure enough, while the long-term EUR bull admits that "the ECB could move the EUR/USD cross by about 5 big figures by cutting the refi rate by 25bp" and that "it is quite possible that we will see EUR/$ drop further towards 1.33", he concludes that "an ECB rate cut could turn out to be a buying opportunity to go long the EUR." And now we know: because what Stolper tells his few remaining muppets to buy, Goldman is selling: if and when the ECB cuts rates, do what Goldman does, not what is says: sell everything.

From Goldman's Tom Stolper

Should the ECB respond to a strong Euro?

On a trade-weighted basis, the EUR is the strongest currency globally – Earlier this week the EUR was briefly the strongest currency globally in 2013. On our GS Trade-Weighted Indices, it peaked at +5.9% year-to-date, outperforming by a whisker the CNY at 5.7%, with the Dollar remaining far behind at +2.0%. Apart from the fact that this has surprised consensus expectations for 2013, it is also becoming a headache for the ECB. At every post-meeting press conference President Draghi faces a number of questions about the exchange rate. In addition, our GSDEER fair value framework implies that the EUR is now overvalued by about 14% against the Dollar and by about 5% on a trade-weighted basis.

The Euro area’s current account position stands in contrast to the EUR valuation signals – Most FX valuation models, including Purchasing Power Parity, are ultimately trade arbitrage models. If goods are substantially cheaper in one country than another, the chances are that people will buy more of the cheaper goods and the resulting demand for the currency in the producer country will help correct the undervaluation. A strong currency over-valuation signal therefore often coincides with a trade deficit and a subsequent correction, as we have seen in EM deficit countries recently. In the Euro area that is not the case. Despite overvaluation, the Euro area currently is not running a current account deficit; in fact, it has the largest surplus ever at about 2.5% of GDP (Germany's is 7% of German GDP). Even vis-à-vis the US, where the EUR is overvalued by 14%, the bilateral Euro area trade surplus currently stands at historical record highs. The opposing current account and valuation signals considerably complicate the case for a weaker EUR.

Euro weakness would theoretically deepen imbalances – Of course, one of the reasons why the Euro area current account surplus has been growing has been slowing domestic demand depressing imports. Using a weaker Euro to substitute domestic demand would support growth but likely increase the imbalances. At least theoretically, the currency depreciation would raise the trade surplus even further. From a G-20 point of view this would be a very controversial policy (even if officially aimed at inflation alone). Already the US is criticising the German government for not stimulating domestic demand more, and the idea of pushing the EUR lower to help growth is met with scepticism in Asia.

An uncertain impact on growth from FX depreciation – Given the frequent calls to depreciate the Euro to boost Euro area growth and raise inflation, we take a quick look at the likely empirical impact. On the growth side we can extract the likely effect of EUR depreciation from the work of our Euro area colleagues in 2009. They estimated trade elasticities for the Euro area and calculated different scenarios for real TWI moves. Relative to a baseline forecast, a permanent real effective depreciation of 10% would raise GDP growth in the first year by 0.4% to 0.5% and in the second year by 0.2%. This is broadly in line with other estimates of trade elasticities but it is also important that the range of estimates varies considerably across a large number of empirical studies. Some authors fail to find evidence of the critical assumption that depreciation leads to an improvement in net trade (technically known as the Marshall Lerner condition). Some recent studies (see, for example, emphasise that exchange rates, net exports and growth are all endogenous and that the nature of shocks will ultimately determine if depreciation coincides with accelerating growth. All said, it is likely that a weaker exchange rate will help growth but the impact is probably weaker and more uncertain than most observers believe. Similarly, the impact on core inflation of exchange rate moves is also difficult to quantify.

How much extra growth for an ECB rate cut? – We estimate that the ECB could move the EUR/USD cross by about 5 big figures by cutting the refi rate by 25bp. We discussed this in more detail in a Daily this week, where we also cautioned that this estimate is unlikely to be more than a guide to the order of magnitude of the response. Historically, a 5-big-figure drop in the EUR corresponds to about a 3% decline in the trade-weighted exchange rate. To calculate the impact on growth, we can use the estimates of our European colleagues. Assuming that this drop is permanent, it would boost Euro area growth by a bit more than 0.1 percentage points in the first year and by a touch more than 0.05 percentage points in the second. It could well be less if the EUR rebounds after the initial decline.

A substantial EUR depreciation to boost growth meaningfully – In order to see a more meaningful impact on growth, for example via a 10% decline in the real TWI, the EUR would have to drop to levels last observed in mid-2012, before the ECB announced the OMT. And again, the EUR would have to stay at those lower levels to get the full growth benefit. To get such a large EUR depreciation the ECB would have to pull many more stops than just a 25bp cut in the refi rate. In addition, the ECB would have to overcome what looks like an underlying appreciation trend. We find evidence of such a trend in our econometric work and it would be consistent with the strong balance of payment position. Our estimates currently suggest that the Euro drifts higher – all else equal – by about 1 big figure per month currently.

Tough FX policy choices in the Euro area – To summarise the challenges for FX policymakers in the Euro area, bringing the Euro down may not help as much as hoped for: it may increase political frictions, deepen macro imbalances and it is difficult to achieve in a meaningful way in any case. As the US Treasury suggests in its semi-annual report, boosting demand in Germany would be a far more effective policy to support growth in the Euro area. Given all these issues, we would be surprised if the ECB made the exchange rate the primary motivation for a policy move.

An ECB cut is possible... – To be sure, there may be other, mainly domestic, reasons to cut policy rates in the Euro area, including the surprisingly low inflation print this week. Demand remains weak in the Euro area and monetary conditions have tightened in recent months, partly linked to the global bond sell-off. In particular, if the disinflation trend persists in the next reading our Euro area economists think a December cut is becoming a close call. And even a cut at the policy meeting next week cannot be ruled out. In turn, such a cut – or the increased likelihood of such a cut – would still have a EUR-negative implication, as discussed above, even though it is already partly being priced by rate and FX markets. On that basis, it is quite possible that we will see EUR/$ drop further towards 1.33.

...but could turn out to be a buying opportunity – However, we are of the view that a rate cut would not be the beginning of a larger attempt to manage the currency weaker. In that respect, an ECB rate cut could turn out to be a buying opportunity to go long the EUR. Our view would change if markets started to price a much more hawkish Fed and the prospect of a genuinely widening interest rate differential with the US. But even then, one would have to factor in the EUR-supportive balance of payment flows.

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Devotional's picture

I am holding a EURO note right now ... oh look! It's paper...

Dareconomics's picture

I happen to agree with Stolper, which does not bode well for my positions:

The table above illustrates the relative advantage or disadvantage of the country’s euro membership, and it is all you need to know in order to correctly predict the ECB’s next move.  Germany is essentially running the ECB, so the bank delivers the monetary policy that the Germans want.  As long as inflation remains low and the value of the euro is weak enough for Germany to maintain its export subsidy, then Draghi will hold the course steady.  If the euro begins to rise above $1.45, Germany will allow a rate cut to weaken the euro.

An expensive euro is not as unlikely as you think.  Eurozone banks are busy selling assets to raise their capital levels before the ECB stress tests.  As long as this process continues, their will be steady buying pressure on the euro.  In the meantime, the ECB is not matching the rest of the world’s central bank printing programs.  As such, the euro will continue to strengthen:

Full post with chart and table:

knukles's picture

Send Tommy Stopout to LAX

...out of space's picture

no why? he is a good indicator. my euro short just become a little bit safe bet.

snowlywhite's picture

yeah, that's my prob. too... It's hard to see that .25% as game changer, given that transmission doesn't work anyway... On a TB look, it should keep going higher?


my scenarios:

- behind doors, ECB says stress tests are for real; yet, I don't see how it'd be possible, given gov. pressure to lax the rules;

- italy wants out


otherwise... ~1.33 should be buy(which, unpleasantly, coresponds with stopler 5 big figure drop). This guy kinda ruined my plan... it's hard to bet with him.

olto's picture

Agreed, Dare,

"In the meantime, the ECB is not matching the rest of the world’s central bank printing programs.  As such, the euro will continue to strengthen:"

however, I was in the Basque country of Spain this summer until late September and saw that even discounts of up to 80% did not ring the cash register. These dudes have no money to spend on anything but food.

I don't know what can be done about this except a redistribution of wealth-----and I am not in favor of such a policy.

I think that there are just too many of one species on this planet.

By the way, I was impressed by how much carbon 300 million citizens of one country can emit in an article above: nearly one ton per year for each human being. Now, that is truly an achievement----we can still beat every nation in carbon emissions.

You don't become number one in anything without a tremendous effort

USA is number one----we are really the winners in every category of self-destruction!


Howdan's picture

Well you know what to do to avoid getting "Stolpered" folks?! - Yep, the exact opposite. So short EUR/USD all round.

Haager's picture

He say's that the Euro is a buying opportunity at lets say 1.33. We're at 1.3485 atos so he's in for saying we should short now and go long at 1.33 - which, if you'd like to do a reverse trade, would be a long now and a short after the immediate hike following a  'no rate-cut yet' decision.

That's my view. My advice is not to play either way.

Iocosus's picture

Going short, thanks Tom

lolmao500's picture

Bullish for the euro :


rp1's picture

This is so dumb it's not funny.  Muppets!

buzzsaw99's picture

stolper is pure comedic gold bitchez

Tim Knight from Slope of Hope's picture

For God's sake, can someone can start a hedge fund fading this guy? I'm thinking raising $500mm AUM in the first few months would be a cinch. The management fee alone could put you into Tom Vu Babe territory.

CPL's picture


None of the bonds are worth anything, who could they ever unload them on and who would ever be able to get their money back?  They won't.  Ever.

observer007's picture

Latest News on LA Airport Shooting:

LAX shut down

syntaxterror's picture

So, let me see if I understand: as inflation goes to infinity, growth is exponential.

I'm loading up on Zimbabwe currency.

JenkinsLane's picture

His business card reads "Chief FX Shill".

Bam_Man's picture

Yes, a 25bps or 50bps rate cut is going to solve the Euro's problem of "not being worthless enough" vis-a-vis the fiat confetti of other countries.

Give me a break.

Ghordius's picture

+1 pure cosmetics and a reason for many to grumble about. lose/lose

Curtis LeMay's picture

Naked euro puts it is, Tom. Thanks!

Hohum's picture

Forget all that.  The 2013 fiscal year federal deficit was only $680 billion.  So happy days are on the horizon, or so I am told.

Yen Cross's picture

  Effin Stolper, the euro has already caved  3 big figures over the last 48 hours. I rarely trade that ponzi currency, but thanks for warning your muppets after the fact Tommy boy.

The key support is coming up here @ the 50day avg. is going to get toasted. I wouldn't be surprised to see eur/usd plow into the 200 day avg. @ 1.3218 


snowlywhite's picture

dude, stop using 3 oscillators; they're all showing the same damn thing...

Yen Cross's picture

 Dude, Learn to trade. I've used every freakin tool there is. I want to "PAINT" the trade. I have (4) moving averages and parabolic SAR.  If you have a better idea ,good on ya... It works for me...

 I also run 3 platforms on 6 monitors to confirm spreads... have fun with that ATX thingy.

Itch's picture

Heard it all, heard it all. He always makes these calls when the indexes are veritably on the turn...who in the name of jumping Jehovah is going to buy into that? (probably worth a tight scalp or two around the daily lows at best, in the hope of a miracle) I'd say the head-melter's are looking at 1.275; i'm trying to picture what a straight run up to 1.5 would look like since the fundamentals in europe are starting to bite again....have to say i doubt that.

Well, if Europe does start to turn up again on that long term trend, then what we are seeing is a frightening undeniable show of strength, which is odd considering no one in europe gives a fuck whether it lives or dies...isn't it strange?

Iam Yue2's picture

The time to trade was when the inflation report came out: Stolper is once again late to the party.

Trampy's picture

The time to trade was when the inflation report came out: Stolper is once again late to the party.

Stolper is fine for a contrary indicator but it seems foolish to assume he'll always get it backward.

Forget trading the major prints.  If you're in a trade for a good reason a print will either add to your profits or stop you out, 50/50 chance.  The time for bear trade was two days last week when 6E was over 1.38.  The trade was sell that extreme new high w. RSI pegged by writing 1.40 and 1.41 OTM calls on first and second day of failed push to 1.39.  Closed trade when it dropped to 1.36.  Double or triple your money in a week with very little risk of pushing past 1.39, but stop out if premium had doubled.

Plenty of liquidity on the 6E options so a stop on a high-OI strike like 1.40 or 1.45 can be working all night.


Yen Cross's picture

 I got long aud/jpy just before the close. WHY? Huge barrier @ .9900 usd/jpy and aud/usd is insanely over sold on the daily and 4hr chart.


Haager's picture

Money markets may be thankful that there's no reason to increase rates - which some Austerians would love to get asap. Low inflation is what they want - they've got it (ok, doesn't apply to food, taxes and gas but to energy (not for you, peasant, thanks to taxing) and housing prices...).

If the Euro is caving in this week before the decision is made, a 'no rate-cut yet' policy is still more than just imaginable - it's still possible that they just increase spending. Therefore I think Goldman already has sold off as fast as possible around the presentation of the 'shocking' inflation (reflation) numbers, and maybe they are going to hike the Euro back up in the days ahead, up to 1.368 and heading to 1.31 in the following period.

Manipulism's picture

Stolpern is German for stumble.

Squid humor.