For months everyone was confused, like lost lambs in a sea of noise and 500x leverage, not knowing how to navigate the stormy, choppy FX seas. Now we know. For that beacon of anti-precision, the man, the myth, the legend who bats 0.000 and thus is the most certain contrarian bet in history, Goldman's Tom Stolper has spoken: "We would now recommend going long EUR/$ at current levels with a one-day stop on a close below 1.18 for an initial target of 1.30." Start your selling.
The announcement by the ECB today to prepare a reactivation of the SMP program but under the condition of a simultaneous EFSF/ESM program is another substantial step forward in terms of containment of the Euro area crisis.
From an FX standpoint we would emphasise the following:
- Using the unlimited ECB resources to anchor front-end rates has the potential to address one of the two key driving forces for the large EUR/$ decline of the last few months: the risk premium attached to sovereign bonds (or at least to parts of the sovereign curve).
- The insistence on strict conditionality will likely build support for this central bank action in countries with strong fiscal positions, in particular Germany. As Huw Pill and the European team pointed out, “from a normative perspective, the decisions announced today are reassuring,” given that the medium-term risks linked to moral hazard have been reduced. At the same time, Mr. Draghi insisted on the implementation of structural measures to sustain the Euro.
- The decision not to cut policy rates further implies that the downside stemming from the second key EUR/$ driving force (interest rate differentials) is limited at the moment.
Independent from this proposal on EFSF/ESM/SMP purchases of government bonds, the already announced centralisation of banking sector regulation under the authority of the ECB is an additional important positive step announced at the last summit and not yet reflected in the price.
For that reason we would now recommend going long EUR/$ at current levels with a one-day stop on a close below 1.18 for an initial target of 1.30. This trade is consistent with the recommendation of our fixed income strategy team to receive 5-year rates in the Euro area periphery (Spain, Ireland and Italy). Timing is the key risk to this trade as many hurdles remain and the exact details of the program will have to be agreed on. Markets may remain volatile as investors wait for Euro-area policymakers to back words with action.
Thank you Tom: we were lost but now we see.
PS. For those confused, this means Goldman is now selling EURUSD to muppets.