Goldman End 10 Year Bearish Postion On The Dollar
I think we all know that Goldman Sachs is the daddy of the financial industry. The credit crunch bullets seem to have slid off them like a financial superhero. OK so they wrote down $3bn but that was based partly on the declining value of its 4.9 per cent stake in Industrial & Commercial Bank of China (ICBC), which is held separately on Goldman’s balance sheet.
So when Goldman call a trade it is time to sit up and listen and they have come out and said they are abandoning their 10 year bearish stance on the Dollar.
Thursday saw a research note from the largest U.S. investment bank saying the dollar’s long-term downtrend has ended and its undervaluation could lead to a substantial improvement in the U.S. balance of payments position.
“It is time to say goodbye to our long-held dollar bearish stance. For about 10 years we have been negative on the dollar, occasionally wrong but mostly right,” Goldman Sachs wrote in a research note.
“But now the valuation and growth-driven improvements that we have been observing for a while have reached the point where they notably improve the medium to long-term outlook for the dollar.”
This call came with a warning, however, that the dollar may see some challenges in the near term because of volatility of oil prices, market positioning and weaker consumer spending. But the “powerful improvements in the real trade balance suggest the dollar has bottomed.” The bank expects capital inflows to start improving.
The bank revised several dollar currency pairs forecast seeing the euro at $1.45 in three months and possibly $1.40 over 12 months.
At a six month low on Thursday the euro traded at $1.4779. The dollar has gained more than 5 percent against the euro so far this month, reaching its highest since February.
Dollar/yen is seen by the bank as hitting 110 yen in three months revised from 106 yen with 114 yen coming in 12 months.
Goldman is basing its forecasts, largely, on the weakness that is being seen in economies outside the US. Interest rate differentials will favour the dollar as traders are pricing in interest rate cuts from central banks such a the Bank of England and the ECB. Goldman also said that the US economy is adjusting well to the undervalued dollar
“The impact of valuation has become much clearer and more powerful—increasing our confidence that strong, underlying forces will lead to continued improvement in dollar fundamentals in the next couple of years.”
So that is that then… short everything against the dollar and blame it on Goldman if it doesn’t work!
What are we seeing from other commentators?
“Yes, it’s for real,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “The U.S. multi-year down trend is over. The process we described as ‘carving out a bottom’ has been completed.”
“Since reaching an all-time low against the major currencies in mid-March, the U.S. dollar has climbed 6%,” wrote Sal Guatieri, economist at BMO Capital Markets, in a note to clients Friday. “The currency has seen several larger, temporary gains during its 38% slide since 2002, but this one could have legs.”
“The euro, looking at a daily chart, looks a lot like a cliff diver. The only difference is that cliff divers eventually hit water,” said Dale F. Doelling, chief market technician at Trends In Commodities. “This market has gone into a freefall after breaking its 200-day moving average yesterday and there seems to be no bottom to the euro,” he said in emailed comments.
