Goldman Sachs: 3 Reasons the ECB Decision is Bullish for the Euro
Goldman Sachs says the ECB’s latest decision is likely bullish for the Euro (via Zero Hedge):
“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.”
Source: Goldman Sachs
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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2 Comments
Dude, I know you’re all about presenting different perspectives, but I feel you should leave a disclaimer here considering Gold in Sach’s Tom Stolper has proven to be the virtually perfect FX contrarian indicator. Not only does me manage to get it wrong, his recommended positions seem to have been stopped out on every occasion I have seen in recent history…
More than flat out disagreeing with his logic (he’s ignoring issues of subordination/priming related to the funding sources as currently detailed, the mismatach of the timing of his call and probable implementation, etc), no where does he address the relevant near term facts that: (i) the eurozone financial system sold off too much of their USD based assets to pay debts in euros that they’re having trouble meeting the servicing requirements of now more expensive USD denominated liabilities (since they’re trading a devalued EUR back to USDs they sold low and are buying high) which has pushed up total notional FX swaps from the FED towards the highs of the last year; (ii) the swiss central bank still has heavy EUR selling and USD buying to do if it wants to meet the diversification requirements it has outlined; and (iii) the shorts got cleared out with the “believe me, I’m super mario” fest.
Of course, I hope he’s wright and I’m wrong so no muppets are harmed…
Apologies if I’m too aggressive here or cynical.
-Witt
I wish they would quit putting band-aids on this thing… but slow are the wheels that move politics while fast are the wheels that move markets.