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In a note to clients today, Goldman Sachs follows up on its recent bullish USD call admitting that price action has gone 'decidedly' against this call as of late.
"Despite an impressive series of positive data surprises – most obviously last Friday’s payrolls – the Dollar has weakened (Exhibit 1). In fact, it has fallen even as the improving data have moved the 2-year rate differential – the tenor that matters most for USD – in favor of the Dollar, albeit slightly (Exhibit 2)," GS clarifies.
USD behavior has switched, even very recently, from the 2010-12 norm. USD now instantaneously strengthens on good data, while it used to weaken slightly in 2010-2012. This, according to GS, means that something else, not growth, is driving current Dollar weakness. Goldman explores this Dark Matter below:
"That leaves something else in the market, a mystery flow, which we think of as Dark Matter. Our prime candidate for this is China’s reserve accumulation. There is a lot of conjecture here, admittedly, but we think it is possible that the shift of past reserve accumulation into Treasuries is weighing on longer-dated yields (and the Dollar) in an effect akin to "Operation Twist," GS argues.
All in all, what does this mean for the USD?
"It looks to us that these flows should abate going forward, allowing instantaneous Dollar strength to spill over into broader price action," GS projects.
"As a result, we retain our positive USD view," GS concludes.
Goldman: 'Dark Matter'; Why Market Has Gone Against Our Dollar call?
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