Goldman Deconstructs Draghi's Conference, Expects "Plenty Of Downside" For EUR, Reiterates 0.95 Target

Tyler Durden's picture

There was a reason why last night we laid out an analysis on the pros and cons of QE vs negative rates: quite simply, those are the last two "tools" left in the central bankers' monetary "twilight zone" arsenal.

And as Mario Draghi made very clear this morning, both are about to be used much more for the simple reason that because they haven't worked until now, they will surely work when they are expanded. After all that is the full extent of Keynesian 101 logic.

The immediate result: the biggest drop in the EUR in 9 months...

... as Europe prepares to unleash yet another global deflationary wave, in the process likely forcing China to proceed with its second devaluation step now that much of the "benefit" from China devaluation against the EUR has been wiped out.


The move will also lead to substantial pain for US multinationals who have already been screaming Uncle as a result of the soaring dollar. They will do even more of that in the next quarter, even if they will all rush to explain how non-GAAP earnings would be much better if one only excludes the "one-time" pain associated with said strong dollar. It also means that with Draghi now pre-empting the Fed's rate hike, it leaves Yellen in an even bigger box, whose now have little possibility to hike rates as the rest of the world (recall that according to Citi in addition to the ECB, there will be more imminent easing from Japan, Australia and China).

But before we get there, there may be even more pain for those who conduct business in Europe, or those long the EUR.

According to Goldman Mario Draghi's upcoming actions (or merely even more jawboning), implies "downside of at least 5-6 big figures from here, i.e. should see us return to near the 1.05 low that EUR/$ made in March." Goldman's ultimate target on the EURUSD: 0.95 in 12 months.

Here are the full thoughts by Goldman's Robin Brooks:

ECB President Draghi today put additional monetary stimulus, above and beyond the measures announced in January, on the map for the December 3 meeting. In particular, he raised the possibility of stepping up the existing QE program and / or cutting the deposit rate further. EUR/$ moved substantially lower during the press conference (Exhibit 1), but we argue in this FX Views that potential downside is still substantial. As we noted in our FX Views earlier this week, we think a 10 bps (surprise) deposit cut is worth two big figures downside in EUR/$. We base that assessment on empirical work we did last year and the September 2014 surprise deposit cut, when EUR/$ fell around two big figures (Exhibit 2). At the very least, following today’s press conference, a December deposit cut is now possible, meaning that EUR/$ – which went into the meeting at around 1.13 – should reprice to 1.11. Of course, there is a good chance that December will instead bring an actual augmentation of the QE program, such that downside in EUR/$ might be larger. The kind of scenarios our European economics team envisage imply downside of at least 5-6 big figures from here, i.e. should see us return to near the 1.05 low that EUR/$ made in March.



From a fundamental perspective, we have argued all year that additional stimulus from the ECB is needed and will come, which formed the basis of our downward revision to our EUR/$ forecast back in March (when we switched to 0.95 in 12 months from 1.08 previously). We developed conviction in our call over the summer, when we showed that developments in the Euro zone, in particular structural reforms on the periphery, look like they are shifting down the Phillips curve, making it harder for the ECB to bring inflation up on a sustained basis. As we argued earlier this week, the Bund sell-off that began in May was harmful to ECB QE, but we think the trend now will be to fix the credibility of the program. Today’s meeting was indeed “decision time” for the ECB, as we had hoped. Given that shift, we think there is plenty of scope for EUR/$ downside from here, in line with our forecasts.

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arbwhore's picture

As always from Goldman, is there really plenty of downside (wrt USD) or is that what they want you to think? We won't really know until Gartman takes a position.

Soul Glow's picture

This is fucking madness.  The central banks buy all the assets in the world, devaluing their currencies in the process, and the very same assets rise in value.

It is far past the tipping point.


KnuckleDragger-X's picture

We're heading toward the monetary version of a gunfight in a dark room where the only thing that matters is who dies first, but in the end, everybody dies.....

MFL8240's picture

Dollar up, Gold down, stocks up.  The perfectly planned sham!   These games will not end well for anyone but these criminals!

ghostzapper's picture

Getting close to the next large deval move by the PBOC?  Bigger picture they want asset backed money and forcing "reverse QE" may be part of th weaponry deployed.  They dropped the big "shocking" deval and then jawboned and intervened to manage the slide with the ultimate goal still being perhaps as much as a 20% deval while of course trying to minimize disruptions on the way down.  ECB stated its case fairly clearly so maybe we see another large deval move for CNY soon.  

Raul44's picture

My target is ~0.85. 

buzzsaw99's picture

i hate it when i agree with the squid but the euro is heading for usd parity imo

venturen's picture

should have been there all along

yogibear's picture

Withe the flood of the middle eastern refugees Europe will have the radicals bombing towns.

Think of it as the ultra-left turning it into a 3rd world middle eastern crapper.

With Isamic law as it's center.

venturen's picture

race to Economic Singluarity! ZERO everything and infinite Stock Market and Banker Bonus!

Herdee's picture

The new Ferrari's for NY's elite will be a lot cheaper by Christmas.Wall Street,get your orders in and ask for the discount.

scatha's picture

Draghi is trying to save German economy that collapses as we speak even before China tried to re-balance it currency to stay competitive in Asia. Yellen failed to do so in September so Draghi today promised he will print like crazy until German export machine is back on track while global demand and trade collapses. The devaluation is the only option for them amid secular collapse of the world demand including in China.

Those economic idiots in  the west thought that when China decrease its interest rates , i.e. attacking their savings, Chinese people go out there to borrow. Instead Chinese increased savings and chocked the economy preparing for future interest income collapse.

More independent opinion on the China and global economy can be found at:


JamaicaJim's picture

Been sayin it and saying it....the Euro is shit