A team at Goldman, decidedly different team from the one which this morning said the EUR could drop to a 1.16 level shortly, looks at recent fund flow data and notes that with the US now perceived as a safe haven to the rest of the world, particularly Europe, a fact which implicitly is a huge benefit to the treasury supply onslaught as buyers for USTs no matter the yield or maturity, are easily found in this environment of insecurity. No surprise there: it is almost as if Europe's problems were engineered, courtesy of a EURUSD which was kept too high, for too long, by too many market participants. Goldman's conclusion is that the dollar is not the fundamental safe haven it is portrayed to be, but is, once again, merely the best of the worst. As Goldman's Robin Brooks highlights: "non-Treasury portfolio inflows are still falling short of covering the monthly trade deficit, in contrast to before the crisis when they were more than enough. This is consistent with our often repeated view that the BBoP (broad basic balance) for the US remains weak and is why â even in the face of strong foreign inflows into Treasuries â we remain cautious about the USD outlook." Brooks continues: Foreign participation â both official and private â was 20.1% for the data available for May, close to the historical average of around 17% and down from a peak of 40% in the immediate wake of the global financial crisis. Though this is only an incomplete picture â it ignores the secondary market â it does argue against reserve managers piling into USD. We get the same impression from other data sources we look at, notably Asian reserve accumulation, which also does not point to a sharp shift in favor of USD. We will continue to monitor foreign participation in Treasury auctions, and the broader portfolio flow picture, with a view to revising our USD outlook as warranted. The primary reason for the increasingly strong bid for gold is explained by Brooks' observation: while unwinds in existing FX carry pairs continue to implicitly benefit the dollar, when it comes to allocating capital to a safe haven, the only recourse continue to be gold. And as FX is fickle, all it takes is one massive short covering spree to invert the balance of power once again in the direction of the EUR: all that would be needed is a wholesale realization that the consolidated US balance sheet is in far worse shape than that of Europe, and for the herd to shift from one side of the boat to the other. Yet should more volatility come into FX markets, gold would benefit even more. From Goldman Sachs: â¢Last week ended with the USD appreciating sharply, on escalating sovereign fears and weaker-than-expected US payrolls. â¢This strength runs counter to our forecast, which is driven by an underlying picture of still weak portfolio inflows, something we have emphasized repeatedly in our BBoP framework. â¢But the Euro crisis has the potential to boost foreign inflows, if foreigners â reserve managers among them â decide the US is the âbest looking horse in the glue factory.â â¢In light of this, we review US Treasury data on foreign portfolio flows to the US, which in March registered an all time high. We also survey more timely Treasury auction data for foreign take-up. â¢We conclude that the fundamental picture â fear aside â is still not USD supportive and will continue to watch closely for any changes http://www.zerohedge.com/article/goldman-sachs-us-dollar-far-weaker-current-fx-pairs-make-it-seem The best looking horse in the glue factory...
I love that. The market didn't do what we thought it would, so the market is wrong. Good luck with that.