Goldman: The Problems With The Euro, Continued

Goldman Sachs note that last week’s “PMI surveys gave a laundry list of reasons to be pessimistic about the Euro area activity outlook, from the war in Ukraine to lockdowns in China to general economic uncertainty. We have some sympathy with this sentiment: our economists have a below-consensus growth outlook for the second half of the year and we think there are still significant downside risks from further gas disruptions, helping push near-term recession odds to around 40%. But, at the same time we find it hard to be outright bearish on the Euro when the ECB is on the brink of such a momentous policy change: exiting negative rates after eight years. This week’s Sintra meeting will likely help firm expectations for an imminent exit of negative rates and a broad anti-fragmentation “backstop.” In the near term, the market will likely focus on whether the exit from negative rates will be in July or September, but in the big picture we think the prospect of this shift -and potential for some private sector investments to return - is enough to justify an optimistic outlook over the medium term. On a more tactical horizon, we think investors looking to play for this theme should look for correlation breaks in CHF. After the regime shift, the SNB is likely to sell assets to maintain a slightly stronger currency if EUR starts to outperform on crosses.”