23 June, AtoZForex .com Lagos – Goldman Sachs has again sent out another interesting perspective to clients. This time covering the puzzling EUR/USD price action which has developed in the past few weeks, as Greek tensions have mounted.
According to the Bank’s perspective, the major driver of the price action development on pair has actually been the activities of Bundesbank. The bank has reduced the maturity of its QE buying, therefore allowing for a sell-off and moving longer-dated rate differentials in favor of the Euro. This has fuelled Goldman’s opinion that ‘EUR/USD hasn’t traded Greece, but instead growing question marks over ECB QE’
Goldman has given a more comprehensive view on the EURUSD based on fundamental and technical developments.
“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,” GS argues.
“With respect to EUR/$, we think the Bund sell-off increases EUR/$ 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/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks,” GS adds.
“We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency,” GS concludes.
The bank also takes a much broader view, forecasting that EUR/USD could be at 0.95 in 12 months and 0.80 by end of 2017.
Goldman Sachs EURUSD outlook on the longterm is a bold review indeed as the pair has already broken a twelve year low this year.