Talk of Euro – dollar parity has resurfaced | Goldman Sachs is a ‘structural USD bull’

We suppose it was inevitable, in the dog days of Summer and with all the excitement that was the Greek crisis apparently off the radar, at least for the time being, that market commentary should return to the fundamental factors that will impact the most strongly traded global currency pair, the Euro against the US dollar. And, once again, the market has the figure of one Euro to one US dollar, or parity, in its sights.

We have often heard parity being talked about since the onset of the global financial crisis in 2008, but it has not come to pass. This time, however, may indeed be different.

Goldman Sachs is a ‘structural USD bull’

A trading team at Goldman Sachs issued a note following last Friday’s US Non-Farm Payrolls report, where they outlined their reasoning behind a prediction that the pair will go to 1.02 within three months, and hit parity within six months. We have constructed a price channel for the pair in the chart above which would, in Technical Analysis terms, be consistent with that target.

GS reckons that US treasury bonds that have a shorter term to maturity, the so-called front end of the yield curve, will from now on attract a risk premium. This is related to the expectation that interest rates will rise at some stage in the US, and is a positive for the US dollar.

They also propose that the resumption of the collapse in oil prices, triggered by the deal to end sanctions against Iran, will increase deflationary pressures in both the Euro zone and Japan. This, in turn, will strengthen the incentive for both of those countries’ monetary authorities to accelerate monetary easing, or QE, a depressor of the value of their currencies, and a driver of the EURUSD to the downside (and USDJPY to the upside).

As has always been the case, it is the growing disparity between US and other regions’ monetary policy that is the real driver of exchange rates.

Goldman Sachs is of the opinion that, right now, the market is dismissing the factors outlined above, but that this will change.