Having flip-flopped from forecasting EUR strength for the next 12 months in April (target 1.40), Goldman has rapidly ratcheted down its expectations for the flailing currency to 1.30 previously and now forecasts EURUSD at 1.20 in 12 months. As Goldman notes, “because we believe the dynamics of the Euro have fundamentally changed and because we expect cyclical outperformance of the US, a prolonged period of Euro undervaluation can be expected and this is reflected in our longer-term forecasts.” Trade accordingly…
Via Goldman Sachs,
1. We are revising down our EUR/$ forecast to 1.29, 1.25 and 1.20 in 3, 6 and 12 months (from 1.35, 1.34 and 1.30 previously). We are also revising our longer-term forecasts lower, bringing the end-2015 number down to 1.15 (from 1.27), that for end-2016 to 1.05 (from 1.23) and that for end-2017 to 1.00 (from 1.20). We switched from forecasting Euro strength to weakness in April, when we revised our 12-month forecast from 1.40 to 1.30, and the decline since then has been faster than we anticipated. Our latest forecast change aims to signal that the current move lower in EUR/$ has staying power and, in our view, is the beginning of a trend.
2. This forecast change is very much a restatement of our bullish Dollar view. Indeed, because we are keeping our EUR/CHF, EUR/GBP, EUR/NOK and EUR/SEK forecasts unchanged, this change is disproportionately important for our trade-weighted Dollar forecast. When we first switched to forecasting Euro weakness in April, this implied a 6% appreciation of the trade-weighted Dollar against the G10 on a 12-month horizon. Since then the Dollar has appreciated about 3%, i.e., about half that, thanks in large part to the drop in EUR/$. Revising our 12-month EUR/$ forecast to 1.20 implies a trade-weighted appreciation of the Dollar against its G10 peers of a further 6%. We think the USD still has room to catch up with the 2-year rate differential, which is currently the most Dollar-supportive since mid-2009 (Exhibit 1). In addition, changes to the Fed’s forward guidance in coming months have the potential to move the rate differential further in support of the Dollar (Exhibit 2), especially if US data continue their cyclical outperformance versus the rest of the G10.
