Goldman Tells Clients To Go Long Euro, $1.45 Three Month Forecast, $1.35 Stop

Just because, you know, we still need the market to go up a little more so we can short the crap out of it even as we tell everyone how stocks have about 100 upside on average (link to Goldman's most recent conviction list, which incidentally benefits massively from a weak dollar, and a strong euro). Furthermore, by going long the euro will not be breaking any soon-to-be-misconceived laws, whereby shorting to EUR or, and we await for official Congressional confirmation on this, buying the dollar, will be seen as an act of treason.

Full Goldman note:

Trade Update: Go long EUR/$ on reversing growth differentials, BBoP-related pressures and declining risk premia in Europe March 12, 2010

We realise that this will be a controversial view given the real and ongoing issues around sovereign risk and the European outlook. While we do see sustainable Dollar strength in the more distant future, we think the short-term pressures are likely to reverse.

Two key forces have led the EUR/$ from 1.51 to current levels; relative growth surprises between the US (positive) and the Eurozone (negative), and the fiscal tremors emanating from Greece. After a new set of fiscal measures announced by the Greek authorities, and their endorsement by members of the Eurogroup and the ECB, the risk premium has started to decline. As for the relative growth surprises, the situation will likely reverse going forward.

Our growth forecasts in the US suggest we will see quite a substantial decline from a peak 5.7% growth rate (qoq ann) in Q4 2009 to about 2% or slightly lower by mid-2010. Much of the renewed slowing in US growth will depend on a fading fiscal stimulus and on the inventory cycle, which appears to have been almost completed in Q4. Consequently, over the next couple of months, output growth will converge towards sub-trend growth in final demand. In the Euroarea, the inventory dynamics are quite different and clearly lag the US. Q4 saw virtually no contribution to growth from inventories, which now will likely come over the next 6 months or so. Moreover, demand growth in the Eurozone is likely to remain much closer to trend than in the US, a reflection that imbalances in the US likely remain a bigger obstacle to a narrowing output gap. Overall, it appears Eurozone growth will accelerate during H1, while US growth is likely to decelerate quite notably. US and German manufacturing orders for January already hint in this direction, as do strong January IP numbers out of France and Italy.

The fiscal risk premium in the EUR, related to the situation in Greece may decline somewhat, given the positive comments from Eurogroup members in response to the enhanced Greek deficit reduction plan presented this week. Should Greece not be able to raise the necessary funds for upcoming debt maturities, it is likely that other Eurozone members will offer the country non-commercial funding. No doubt, the fiscal challenges in southern European countries are far from being solved but some highly disruptive tail risks appear removed for now and hence an extension of the decline in risk premium appears likely.

In addition to declining fiscal risk premia and an expected reversal of growth surprises, the external side also remains Dollar negative. The Eurozone current account deficit is about 0.6% on a 12mth trend basis, while the equivalent US figure continues to show a much larger deficit of currently 3.3% of GDP. Moreover, when looking at the broader FX supply and demand in terms of the BBoP (current account + portfolio flows + foreign direct investment), the US deficit runs at 3.9% of GDP (4-qtr trend), while the Eurozone records a surplus of 2.2% of GDP. Higher frequency data does not suggest there has been a notable change to these trends.

Combining these factors, we think EUR/$ has the potential to rally from here towards our 3mth forecast of 1.45. We would go long with a stop on a 1-day close below 1.35.


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