Wednesday, 16 December 2009

Great EUR/USD call from Goldman Sachs!

Over the last few sessions Goldman Sachs (GS) along with JP Morgan (JPM) and Bank of America (BAC) have been drifting downwards towards critical levels resulting in a drop in the KBW Banking Index yesterday below its 200 day EMA (more on that issue here).

Several inter-related questions come to mind.

Q1 What has been a coincidental factor during this period when these large trading firms have been declining?

A1 A reasonably serious sell-off in the Eurozone currency which has helped to bring some life into the US dollar which had been looking about as buoyant as a lead balloon until recently.

Q2 What are the possible knock-on effects of a revitalized dollar?

A2 The spreads which underlie and in some ways are the forex carry trade would start to go the wrong way for a lot of the large proprietary trading desks that have been mercilessly betting on US dollar weakness for months generating substantial profits, just on the currency leg, leaving aside any earning of interest rate differentials.

Notice the huge green volume spike on the open in GS which more or less coincided with a comment from the company that it is recommending long EUR/USD positions towards $1.55 in three months to clients. Not surprisingly the euro is now finding a strong bid and the GS shares appear to be breaking out of the downward wedge pattern.

Once again it pays to remember the re-phrased commercial from yesteryear
"Shhh...when Goldman speaks the market listens!"

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