EUR/USD forecasts cut by Goldman Sachs
Goldman's "Top Trade Recommendations For 2015"
Psst, want to lose some money fast? Then you, like Goldman's Global Opportunities Hedge Fund, should have invested in Goldman's own top trading ideas for 2014, a hedge fund which as we reported is down 2.6% YTD.
But in case you missed out on this sterling opportunity to blow money in nominal and real terms, you are in luck, because seconds ago Goldman's "smartest men, and women, in the room" released their first Top 8 trades for 2015. Which, as a reminder, are a great moneymaking strategy for Goldman's flow desk which is on the other side of these trades, and assures a loss for all those, Goldman's internal hedge funds included, who are on the receiving end of Goldman's wisdom. And yes, all those who wish to keep shorting those 10 Years - a trade Goldman can't stop recommending year after year - can just mail a blank check to Goldman right now.
So without further ado, here they are:
Top Trade #1: EUR/$ downside via a one-year EUR/$ put spread.
Top Trade #2: 10-year US Treasuries above 3% but not below 2% in mid-2015, through cap and floor spreads at zero cost.
Top Trade #3: Long a Dec-2015 Eurostoxx 50 ‘bull’ call spread.
Top Trade #4: Long US High Yield credit risk via 5-year CDX HY junior mezzanine tranches.
Top Trade #5: Long an equity basket of EM crude oil importers (Taiwan, Turkey and India).
Top Trade #6: Short CHF/SEK.
Top Trade #7: Bearish Copper relative to Nickel, on supply divergence.
Top Trade #8: Long US Dollar against a basket of ZAR and HUF.
Some more detail:
Top Trade #1: EUR/$ downside via a one-year EUR/$ put spread
Position for EUR/$ downside via a one-year 1.20/1.15 put spread for around a 4.5 to 1 potential maximum payout.
We forecast that EUR/$ will fall to 1.15 over the next 12 months, in equal parts a reflection of our Dollar bullish view and Euro bearish outlook. In particular, given that HICP inflation is unlikely to rebound in coming months, there is a chance that additional ECB easing, including possibly sovereign QE, comes sooner rather than later, setting the stage for EUR/$ to move meaningfully lower in the short term.
Top Trade #2: 10-year US Treasuries above 3% but not below 2% in mid-2015, through cap and floor spreads at zero cost
Buy a constant maturity 10-year US Treasury 3.00-3.50% ‘cap spread’ at zero cost by selling a corresponding 2.24-1.75% ‘floor spread’, both expiring on June 30, 2015.
We expect 10-year US Treasuries (TY10), currently yielding around 2.3%, to trade at or above 3.0% next June – one quarter ahead of the market-implied lift-off date for the Federal Funds rate. Our Sudoku model indicates that TY10 are already trading ‘expensive’ relative to our Economics team’s global macro outlook, and puts yields in a 3.10-3.50% range in the second half of next year. TY10 outcomes higher than 3.5%, implying a 5-year 5-year forward rate of over 4.0%, are unlikely over this horizon, especially considering that German Bund and JGB yields are still capped by the respective central banks.
Goldman Lists Euro Weakness Versus Dollar as Top Trade for 2015
Projections for declines in the euro versus the dollar as monetary policy in U.S. and the euro area diverge are the basis for the top trade Goldman Sachs Group Inc. is recommending to clients for 2015.
The bank predicted the euro will slide to $1.15 during the next 12 months and advised clients to use an option strategy to capitalize on this move. The 18-nation euro was little changed at $1.2555 at 9:50 a.m. in New York trading.
“The U.S. economy, which is ending 2014 on a strong note, will continue to expand at an above-trend rate,” strategists at Goldman led by London-based Francesco Garzarelli, the firm’s co-head of macro and markets research, wrote in a note today. “This should progressively drive up real rates, and lead to an appreciation of the dollar. Monetary policies are set to diverge between the euro area and the U.S., a reflection of diverging growth and inflation outlooks.”
Goldman recommended a so-called put spread on the exchange rate, which involves the simultaneous purchase and sale of two different options that each grant the right to sell the shared currency. In this two-legged trade, an investor buys a one-year euro put at a strike price of $1.20, which represents the exchange rate at which the owner can sell the euro, and sells another struck at $1.15.
When all the banks are telling the same thing, why are still there traders that think that something else will happen. There is no way how Euro will go up against $ (unless a WWIII breaks out)
When all the banks are telling the same thing, why are still there traders that think that something else will happen. There is no way how Euro will go up against $ (unless a WWIII breaks out)
It is happening because the majority is counter trend trader. Simple psychology : "I am smarter than they are" and "The market is not controlled" causes
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Fears of German recession are not the only reason behind lower forecasts for EUR/USD.
The team at Goldman Sachs lists several reasons why euro/dollar should further fall and update their 3, 6 and 12 month forecasts to the downside.
Here is their view, courtesy of eFXnews:
Goldman Sachs cuts its EUR/USD forecast and now expects the pair to trade at 1.23, 1.20 and 1.15, in 3, 6 and 12 months from 1.29, 1.25 and 1.20 previously. GS expects EUR/USD to fall to parity by the end of 2017.
“Overall, we think current levels in EUR/$ do not yet reflect the kind of balance sheet expansion that ECB President Draghi has mentioned. As the market becomes more comfortable that the ECB will bring its balance sheet back to early-2012 levels, we think we will see more Euro weakness,” GS projects.
“In addition, our European Economists see downside risks to the ECB’s inflation and growth forecasts, which points to the potential for more easing beyond the measures that have already been announced,” GS adds.
“We think a large portion of foreign portfolio inflows into the Euro area since Mr. Draghi’s “whatever it takes” speech is likely to be unhedged. This means that the underlying long Euro position is likely to be sizeable, which is ignored by simple positioning metrics like the CFTC’s CoT report,” GS argues.
“The price action around last week’s US non-farm payrolls (NFP) also tends to support this view. Exhibit 10 shows the reaction of G10 currencies versus the Dollar in the 30 minutes around last week’s positive surprise on payrolls (the positive bars show how much the Dollar appreciated against each currency in the 30 minutes after the payrolls release). There is no sign that the Dollar lagged in its rise against the Euro, which we would see as a sign that short Euro positioning is stretched,” GS clarifies.
“As a result, Euro downside remains our top conviction view,” GS concloudes.
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