Goldman Sachs recommends EUR/USD longs, targets 1.3500

From Goldman: Go long EUR/$ on better growth in the periphery and large BBoP differential

"The Euro area PMI numbers over the last two months point to notable improvement in the periphery. Spain’s manufacturing PMI has risen to 50, which would be consistent with marginally positive growth. In turn, this creates upside risks to 2013 consensus growth expectations, which remain very low at around -1.6% yoy. The Italian PMI also improved. Stabilising growth in both countries could lead to further sovereign spread compression, which has been a positive factor for the EUR in the past.



The balance of payments situation remains very EUR supportive as well. The current account surplus is now close to 2.5% of GDP and weak but improving growth in the Euro area translates into balanced net portfolio and FDI flows. As a result the BBoP (= current account + FDI + portfolio flows) remains in sizable surplus, similar to the current account, and typically this is consistent with EUR appreciation.



On the US side, the BBoP situation remains relatively unchanged. The current account deficit has been stable at about 3% of GDP since 2009, but FDI and portfolio flow remain on balance slightly negative. As a result, the BBoP shows a deficit of about 3.5% on a 4-quarter rolling basis and 5.1% on the latest reading, typically consistent with Dollar weakness.



In the short term, there is the risk that a dovish ECB meeting provides a headwind, but we think further contraction in Euro-area risk premia and the large difference in the external balances will dominate and continue to support EUR/$. We would go long at current levels of about 1.3060 for an initial target of 1.35 with a stop on a close below 1.28."



I'll just add that the previously published estimates banks BBVA and Deutsche Bank have recommended short position with the level of 1.26



best regards,
oscarjp

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