The Fed’s future path still seems more bullish than the European Central Bank. If so, the yiel...
Goldman Sachs Suggests Going Long EUR/USD
06/11/2009 12:01 am EST
The EUR/USD has taken out the 1.4000 handle after Goldman Sachs put out a recommendation to go long the pair with a 1.3720 stop and 1.4500 target earlier Wednesday. While Goldman cited a plethora of reasons including easing risk aversion concerns, rising commodity prices, and undermined confidence in the reserve status of the dollar, we believe that ultimately, the long EUR/USD trade is driven by the continuation momentum of the global recovery.
To that end, we remain skeptical of the long euro positions at this time, believing that the salad days of the recovery trade may be behind us. Q2 of 2009 was marked by the rebuilding of inventories by corporations, which lifted the manufacturing and service output gauges off of their multi-decade lows. But Q2 also demonstrated that the consumer in the G10 universe continued to retrench.
We believe that this change in behavior is secular, rather than cyclical in nature, as consumers will continue to allocate their disposable income to savings and debt service rather than additional spending. Under those conditions, it is difficult to imagine that growth projections for the second half of 2009 will be realized in the face of lackluster final demand. Therefore, the recovery trade could soon run out of steam.
Undoubtedly, consumer sentiment has improved, and the latest IBD/TIPP survey of economic optimism having crossed 50 is only the latest sign of a more positive attitude about the US economy. However, we do not believe that the change in sentiment will translate into a marked uptick in spending,
The new US retail sales report could well be the marquee release of the week. If the number surprises to the upside, the high-beta bulls could grab control of the market and the recovery trade could have further room to the upside. However, if the data once again demonstrates only tepid demand, the EUR/USD will have difficulty clearing its recent highs. For the time being, we continue to be cautious at these levels, believing that both the possibility of disappointment and the risk of retracement remain high.
By Boris Schlossberg of GFTForex.com
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