Goldman FX Head: "No Central Bank Conspiracy" To Crush The Dollar, "We Are Right, The Market Is Wrong"

Anyone having listened, and traded according to the recommendations of Goldman chief FX strategist Robin Brooks in the past 4 months, is most likely broke.  First it was his call to go very short the EURUSD ahead of the December ECB meeting, which however led to the biggest EURUSD surge since the announcement of QE1.  Then, two weeks ago, ahead of the ECB meeting he "doubled down" on calls to short the EUR ahead of the ECB, the result again was a EUR super surge, the biggest since December. And then, as we previously reported, ahead of the FOMC's uber-dovish meeting, Brooks released a note titled the "The Dollar Rally Is Far From Over" in which he said the following: "today brings the latest FOMC meeting. We expect the Fed to signal that it wants to continue normalizing policy, which means three hikes this year and four in 2017, with the statement referring to the risks as “nearly balanced,” reverting to phraseology used in October, just before December lift-off. Overall, our sense is that the outcome will be more hawkish than market pricing, in particular given that the FOMC may leave open the option of tightening at the April meeting."

He couldn't have been more wrong, and the result was the biigest two-day crash in the US Dollar.


In sum, just his latest three calls have resulted in nearly 1000 pips worth of losses. Add 50x leverage and...well, we know why hedge funds are getting obliterated.


One thing we didn't know is  whether after being spectacularly wrong for three consecutive times, Brooks would finally thrown in the towel and stop crucifying muppets. We got the answer this morning, when not only has Goldman's chief FX strategist quadrupled down on his wrong-way bets, saying it's not Goldman that is wrong, but the central banks (as he puts it, "an unfortunate series of misfires from central banks, most notably the ECB"), and perhaps more importantly, quashes speculation that there is a central bank conspiracy to move the dollar lower, to wit. "we see no conspiracy to stabilize exchange rates", which is all the confirmation we needed that the Shanghai G-20 summit was indeed just a mini Plaza Accord "conspiracy" (in Goldman's words) to force the dollar lower, if only for the time being until the impact of the soaring Yen and Euro slams Japanese and European stocks low enough, and we go back to square one at which point Goldman will finally be right, and the USD will soar 15% higher in very short notice.

Here is Brooks' full note:

Going up is hard to do


Over the past year, the Fed has repeatedly arrested the Dollar rise (Exhibit 1) and this week’s FOMC, with the shift in rhetoric towards caution over external risks, marked another iteration. We have sympathy for the Fed’s dilemma. After all, BoJ and ECB easing led the Dollar to rise sharply in H2 2014, before US monetary policy normalization could even begin. For the Fed, this is a major headache because – if our expectation for Fed hikes is correct – USD could rise another 15 percent (Exhibit 2), i.e. underlying appreciation pressure is large. This might be why the Fed is modulating its message, for fear that sounding upbeat could trigger another sharp rise in the Dollar. In this FX Views, we make three points: (i) dovish shifts from the Fed over the past year have only been able to put the Dollar into a holding pattern, they have not reversed the 2014 rise; (ii) data will ultimately force the Fed’s hand, which is why our US economists have stuck with their call for three hikes this year; and (iii) the underlying case for the divergence trade is stronger, not weaker, given that a dovish Fed will spur US outperformance versus the Euro zone and Japan. Going up is hard to do, but the Dollar will go up.



There is no doubt that Wednesday’s FOMC was a dovish surprise. But it is important to distinguish between what this week may signal (delayed tightening) and what it does not (a return to easing). This distinction matters because – as we have learned over the past year – delay only arrests Dollar strength, it does not reverse it. In the big picture, our first commandment for 2016 FX still stands, which is that – following the large rise of the Dollar in H2 2014 – the growth and inflation picture looks robust, which means that underlying momentum in the US is stronger than it appears. This is one reason why our US team has stuck to its call for three hikes in 2016 and why we believe data will ultimately force the Fed’s hand. In the interim, there are obviously questions around the Fed’s reaction function. The one thing that stands out to us is that recent Fed statements have become more volatile: dovish in September over global risks, hawkish in October with the signal for imminent lift-off, dovish in January with the suspended risks balance, and dovish again this past week (Exhibit 3). This argues against taking this latest surprise too seriously. If we are right about data, the Fed could quickly reverse course, in line with our US team’s call.



There is mounting concern – after the recent run of unhelpful central bank meetings – that the divergence trade is over. But from a fundamental perspective, this week’s dovish shift from the Fed will only spur US outperformance versus the G10, which is pronounced even with the Dollar substantially stronger over the last two years (Exhibit 4). For the US in such a setting to loosen its financial conditions at the expense of its G10 peers makes no sense (Exhibit 5), something that has only been compounded by the ECB’s pivot to credit easing (Exhibit 6), given that Euro strength in the wake of that decision has been undoing some of the positives from tighter credit spreads. Overall, the fundamental case for the divergence trade is stronger, not weaker, after the latest Fed meeting.



Pessimism over the divergence trade is compounded by worries that the February G20 meeting may have seen a behind-the-scenes agreement for the ECB and BoJ to desist from policies that could push the Dollar stronger. Comparing the February communique with that from September, there are two notable changes. First, the February communique contains language that countries should refrain from “disorderly moves” in their exchange rates, a reference to China and in line with our view that a large, one-off devaluation of the RMB is unlikely. Second, the September communique contained language that “monetary policy tightening is more likely in some advanced countries,” a reference to US monetary policy normalization. That language is missing from the February communique, which we think reflects US officials’ concern over market moves at the time. With the rebound in risk since then, we think that omission is dated, much as the past week’s dovish shift from the FOMC may turn out to be. We see no conspiracy to stabilize exchange rates, just an unfortunate string of misfires from central banks (most notably the ECB), which will ultimately reinforce the divergence theme.

Goldman's determination to see the USD higher probably means that the dollar has quite a bit downside left. Recall from our post yesterday, that the best trade to take advantage of this is to sell the USD during US hours offset by a dollar long during the rest of the trading day.

Only once Brooks is Gartmaned, will it be safe to go long the USD again, a move which will also unleash the next leg lower in crude, and thanks to China's promptly response, global stock markets too.