Goldman Sachs on why they remain euro bears
In a special note to clients, Goldman Sachs discusses the puzzling EUR/USD price action over the past few weeks as Greek tensions have mounted.
Goldman argues that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the euro and as such Goldman thinks that 'EUR/USD hasn't traded Greece, but instead growing question marks over ECB QE'.
Here is how how Goldman discusses what Greece means from an economic perspective and for EUR/USD along with its latest forecasts for the currency pair.
"From an economic perspective, Greece shows that "internal devaluation" - whereby structural reforms are meant to restore competitiveness and growth -is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because - even if a compromise involving a debt haircut is found - this will not do much to return Greece to growth.Only a managed devaluation, with the help of the creditors, can do that," Goldman Sachs argues.
"With respect to EUR/USD, we think the Bund sell-off increases EUR/USD downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion.We estimate that the immediate aftermath of a default could see EUR/USD fall three big figures. The ensuing acceleration in QE would then take EUR/USD down another seven big figures in subsequent weeks," GS adds.
"We thus see Greece as a catalyst for EUR/USD to go near parity, via stepped up QE that moves rate differentials against the single currency," Goldman concludes and maintains its EUR/USD forecasts at 0.95 in 12 months and 0.80 by end of 2017.
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