Declining US Activity and European Fiscal Risk Premia

- "Weaker US growth, reasonably solid Euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks, and have motivated another forecast change to reflect more broad USD weakness than before. We now project EUR/$ at 1.35 and 1.38 in 6 and 12 months to reflect the fundamental outlook. However, it is too early to sound the ‘all clear’ on the Euro in the near term as political stress could intensify again. Many European governments are still facing low approval ratings and the post-holiday period may be critical. We therefore keep the 3-month forecast at 1.22. Projected Yen strength is linked to US rate differentials and a reduced likelihood of Japanese interventions in light of the new managed $/CNY float. Our new $/JPY forecasts stand at 85, 83 and 90. We also discuss the impact of Renminbi appreciation in more detail. Lastly, developments in Europe and Switzerland suggest EUR/CHF can continue to depreciate, despite the move already seen. Our new forecasts see a temporary move below 1.30."
GoldmanSachs Global Viewpoint 20100714

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