Trading FX without a Tom Stolper reco to fade is complicated: there is always the risk of losing money. Luckily, that risk is now gone and for all those unsure which pair to short, the man with the 0.001 batting average has just come out with his latest piece of muppet-slaying "research", according to which it is now time to go long the EURUSD, with a 1.35 target and a 1.28 stop loss. You know what to do.
From Goldman: Go long EUR/$ on better growth in the periphery and large BBoP differential
The Euro area PMI numbers over the last two months point to notable improvement in the periphery. Spain’s manufacturing PMI has risen to 50, which would be consistent with marginally positive growth. In turn, this creates upside risks to 2013 consensus growth expectations, which remain very low at around -1.6% yoy. The Italian PMI also improved. Stabilising growth in both countries could lead to further sovereign spread compression, which has been a positive factor for the EUR in the past.
The balance of payments situation remains very EUR supportive as well. The current account surplus is now close to 2.5% of GDP and weak but improving growth in the Euro area translates into balanced net portfolio and FDI flows. As a result the BBoP (= current account + FDI + portfolio flows) remains in sizable surplus, similar to the current account, and typically this is consistent with EUR appreciation.
On the US side, the BBoP situation remains relatively unchanged. The current account deficit has been stable at about 3% of GDP since 2009, but FDI and portfolio flow remain on balance slightly negative. As a result, the BBoP shows a deficit of about 3.5% on a 4-quarter rolling basis and 5.1% on the latest reading, typically consistent with Dollar weakness.
In the short term, there is the risk that a dovish ECB meeting provides a headwind, but we think further contraction in Euro-area risk premia and the large difference in the external balances will dominate and continue to support EUR/$. We would go long at current levels of about 1.3060 for an initial target of 1.35 with a stop on a close below 1.28.
With the ECB likely jawboning for more "360 credit" easing in two days, and the threat of a breakout NFP number on Friday sending the USD soaring on a resurgence of Taper tantri (or is that tantrums?) and the EUR imploding, we kinda have a feeling which way in the EURUSD the Goldman FX flow desk is axed...