“For the past few months, Goldman Sachs has had a problematic trade on its hands.
On October 22, 2012, the bank’s currency strategists recommended clients go long the euro against the Canadian dollar. The trade was initiated at a level of 1.296 with a target of 1.37. (At the time, Goldman saw more upside to the euro in Canadian than in U.S. dollar terms, owing to a projected shift in Bank of Canada monetary policy).
The trade has gone nowhere. It reached its highest point on December 28 – but by then had only risen to around 1.3170. After that, it tanked into the new year and has languished in recent days.
That is to say, the trade languished up until yesterday, when ECB President Mario Draghi revealed that the central bank’s latest decision not to cut interest rates was unanimous on the Governing Council.
Bloomberg, Business Insider
Since then, the euro has staged a sizable rally.
Today, Goldman Sachs FX strategist Robin Brooks says in a note to clients that it should go much higher. However, Brooks’ reasoning still has more to do with what Draghi said in July – that the ECB would “do whatever it takes to save the euro” – than what he said yesterday.
Since the introduction of the ECB’s OMT bond market intervention later this summer, government borrowing costs have dropped precipitously in the periphery. Nowhere is this more apparent than in Italy, where the spread between Italian 10-year sovereign bonds and German bunds fell below 250 basis points today for the first time since before the euro crisis exploded.
However, recently the euro crisis conversation has turned to fundamental economic growth and eurozone member states’ inability to meet economic targets. Today, the rate of contraction in Spanish industrial production unexpectedly accelerated to a staggering 7.2 percent, well below the 3.1 percent decline in the previous month and economists’ expectations of a 1.5 percent contraction.
Hence, a new debate: what’s really driving the euro? ..”
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