9 Out of 9 : Stolper Capitulates Again

Ladies and gentlemen: we bring you.... 9 our of 9. That would be the number of times (at least since we have started counting) that Goldman FX maven Thomas Stolper has capitulated on his calls. IN A ROW.

Just out from the 0.000 batter:

On January 25 we recommended short USD exposures against the EUR, MXN and CAD (we closed the latter on February 10 after it hit our trailing stop). The dollar-bearish implications from the dovish surprise in the Fed’s communication, the reduction in Euro area risk premia following the ECB’s LTRO operation and the improvement in global growth data have been among the key sources of motivation for our recommendations, which have so far posted potential gains.


We expect these underlying thematic currents to remain key drivers for exchange rates in the medium term. However, in the very near term, the risk-reward for our recommendations has deteriorated. We would therefore recommend that investors close positions, even though they are trading well short of our target, for the following reasons:

  1. The compression in sovereign risk premia has run most of its course. As Francesco Garzarelli and team argued yesterday (see Trade Update: February 14), sovereign spreads in the Euro area periphery have tightened significantly, and although the compression may extend, the upside is now significantly smaller vs. a month ago. Hence, the team has recommended closing Italy 10y vs France 10y bond positions.
  2. The next few weeks will see significant uncertainties linked to the implementation of the Greek PSI. Near-term volatility could pick up on the back of this. As Dominic Wilson, Kamakshya Trivedi and Stacy Carlson have recently shown (see Global Economics Weekly 12/06), while positions closely linked to US growth prospects (such as our long Russell 2000 recommendation) can continue to work even as Euro area risks intensify, as long as US data remains solid, this is much less the case for FX. Even currency pairs with a heavy degree of “leverage” to stronger US growth, such as the MXN, can underperform in an environment where Euro area tensions create market noise.

All told, we think the near-term risk-reward in our long EUR/$ and short $/MXN recommendations is less appealing and we recommend that clients close positions, with small potential gains of 0.3% and 2.9% (also accounting for carry).

At least he didn't wait until the EURUSD hit 1.25 first like on previous occasions. As a reminder, the latest call was initiated on January 25 as follows:

The one we have all been waiting for. Stolper about to be 9 out of 9 with a 0.000 hit rate.

"The latest Eurozone PMIs have been better than expected and are now consistent with slightly positive growth.


At the same time, Eurozone policymakers continue to make gradual progress on the ESM and Fiscal Compact Treaties. Finally, the Fed has surprised markets with a more long-dated interest rate guidance than expected. In particular the Fed now expects "exceptionally low levels for the federal funds rate at least through late 2014," which is at the margin more dovish than anticipated by the market. All these factors suggest that EUR/$ could continue to rally in the near future and the Dollar could weaken more broadly, in line with our long-held underlying view and forecasts.


Some risks persist, though. The main source of Eurozone uncertainty at the moment remains the Greek PSI negotiation and potential contagion. However, the range of debated NPV reduction is relatively narrow, suggesting an agreement is not that far away. On balance, we therefore think the positive PMI and Fed surprises outweigh the remaining PSI-related concerns.


Overall, near-term downside risks for EUR/$ – though of course they remain – appear to have been reduced. We expect further gains in EUR/$ from current levels, in line with our constructive 3-, 6-, and 12-month forecasts. We would go long EUR/$ with a stop on a close below 1.29 for an initial target of 1.38."

Time to short EURUSD at 1.3093

Needless to say, we are now closing our short reco at a profit 9 out of 9 times in a row, and doing the opposite - i.e., going long.

This also means that it is now smooth sailing for the EURUSD to hit 1.50. But first it will require the Fed to print, print, print, as has been our thesis all along. We expect that to happen shortly after the 2nd LTRO and the Greek default sends the EUR plunging before all FX intervention hell breaks loose.