10 Jul 2015
Case for EUR/USD down is strong, with or without Greece – Goldman Sachs
FXStreet (Barcelona) - FX Analysts at Goldman Sachs, believe that the recent Greece related tensions are the necessary catalyst to push EUR/USD towards parity, and even on a Greek deal, ECB’s QE will keep the currencies path lower.
Key Quotes
“The uncertainty around the negotiations between Greece and its creditors means the market has low visibility, unable to trade beyond the immediate headlines. In this situation, the market seems persistently to err on the side of optimism, discounting negative developments to focus on the prospects for a positive resolution. This has been reflected in the modest reaction in peripheral spreads, equities and the EUR.”
“The potential for contagion from Greece to other peripheral markets has been reduced by various European institutional changes – the creation of the European Stability Mechanism (ESM), progress towards Banking Union, the ECB’s OMT – as well as the current ECB QE programme. However, risks continue to be skewed towards a further intensification of pressure, and this may even be a necessary step towards our base case, which remains an eventual accommodation between Greece and its creditors.”
“Despite the lacklustre reaction in EUR/$ so far, we continue to see mounting tensions over Greece as a catalyst for EUR/$ to go near parity, should tensions escalate further. In particular, contagion to other peripheral bond markets would likely be met with a forceful ECB response, including additional asset purchases. Any acceleration in the ECB’s QE programme would weigh on EUR/$.”
“More broadly, we think mounting tensions around Greece may focus market attention on the sustainability of the adjustment programme in the Euro area periphery. We think the lesson from Greece is that ‘internal devaluation’ – whereby structural reforms are meant to restore competitiveness and growth – is difficult politically and a poor substitute for outright devaluation. Our view is that Greece-related tensions are simply the near-term manifestation of the ‘growth crisis’ in the Euro area, which underpins our longer-term fundamental view.”
Key Quotes
“The uncertainty around the negotiations between Greece and its creditors means the market has low visibility, unable to trade beyond the immediate headlines. In this situation, the market seems persistently to err on the side of optimism, discounting negative developments to focus on the prospects for a positive resolution. This has been reflected in the modest reaction in peripheral spreads, equities and the EUR.”
“The potential for contagion from Greece to other peripheral markets has been reduced by various European institutional changes – the creation of the European Stability Mechanism (ESM), progress towards Banking Union, the ECB’s OMT – as well as the current ECB QE programme. However, risks continue to be skewed towards a further intensification of pressure, and this may even be a necessary step towards our base case, which remains an eventual accommodation between Greece and its creditors.”
“Despite the lacklustre reaction in EUR/$ so far, we continue to see mounting tensions over Greece as a catalyst for EUR/$ to go near parity, should tensions escalate further. In particular, contagion to other peripheral bond markets would likely be met with a forceful ECB response, including additional asset purchases. Any acceleration in the ECB’s QE programme would weigh on EUR/$.”
“More broadly, we think mounting tensions around Greece may focus market attention on the sustainability of the adjustment programme in the Euro area periphery. We think the lesson from Greece is that ‘internal devaluation’ – whereby structural reforms are meant to restore competitiveness and growth – is difficult politically and a poor substitute for outright devaluation. Our view is that Greece-related tensions are simply the near-term manifestation of the ‘growth crisis’ in the Euro area, which underpins our longer-term fundamental view.”