Those who, like me, are in the maddening habit of tracking markets on a minute-by-minute basis have already seen the Goldman dollar call.
Specifically, the “smartest” guys on the Street have seen enough. They’re throwing in the towel.
I’d really like to regale you with the long history of this reco, but somehow I doubt you care despite the fact that the story has significant comedic value.
The reason this is notable to general audiences is that it of course comes on the heels of an abysmal quarter for what, going into 2017, was the consensus trade.
One person who hasn’t helped the previously “crowded” long USD thesis is Donald Trump who, like Turkish President-turned-Sultan Recep Tayyip Erdoğan, has a penchant for playing FX/rates strategist. Witness last week’s “bombshell” WSJ interview in which, for the second time this year, Trump jawboned the greenback lower via the Journal.
No matter what Steve Mnuchin says, it’s Trump’s bombast that matters and ironically, it’s his failure to execute on his agenda that’s helped deflate the reflation narrative.
So it’s hard to blame Goldman for giving up. Below, find excerpts from the note out this morning.
Today we are closing our two long-Dollar ‘Top Trade’ recommendations, initiated on November 17 of last year: long USD versus EUR and GBP, and long USD/CNY via the 12-month non-deliverable forward (NDF). The EUR and GBP trade would have resulted in a potential total return of -0.2%, as modest carry gains partially offset a spot return of -0.6%. The USD/CNY trade would have resulted in a potential loss of 1.1%, after coming close to our target just before year-end.
We see three main reasons why these trades have not performed year-to-date, each of which looks likely to remain a Dollar headwind for the time being. First, global growth has picked up, reducing the degree of US outperformance. Exhibit 1 shows changes in rolling one-year-ahead GDP growth forecasts for the G10 economies since November 7, 2016, just before the US presidential election. Although forecasters have marked up their US growth expectations over this period, the changes have been more modest than for other economies, including the UK and Euro area. Admittedly, this may partly reflect weakness in tracking estimates of Q1 GDP growth in the US—the ‘soft’ or survey-based data there offer a much more upbeat take on current growth momentum. But, so far at least, uncertainty about the true pace of activity, as well as the slow start on tax reform and infrastructure spending, appear to have kept optimism about the US outlook in check. Meanwhile, China has expanded fiscal and credit policy, lifted domestic interest rates, and closed the capital account—all of which affected our USD/CNY call.
Second, the new administration has expressed concern about further Dollar appreciation. For instance, in a recent interview with the Wall Street Journal, President Trump said: “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately.” This echoes his comments during the campaign, as well as press reporting on the Dollar views of some of his economic advisers (although Treasury Secretary Mnuchin said yesterday that a strong Dollar could be beneficial over the long run). The Administration’s currency views could affect the Dollar through a variety of channels, including its appointments to the Federal Reserve Board and through aspects of trade and fiscal policy. For example, concerns about additional Dollar appreciation may have been a partial factor behind the administration’s lukewarm reaction to the proposed border-adjusted corporate income tax. Currency appreciation has also come up in the context of trade negotiations, with Commerce Secretary Ross saying last month: “We need to think of a mechanism to make the dollar-peso exchange rate more stable.
Third, although we ultimately expect the FOMC to deliver more rate increases than discounted by markets, Fed officials have been in no particular hurry to speed things up. Our US Economics team expects rate increases at the June and September meetings, followed by an announcement on balance sheet normalization in Q4. Starting balance sheet normalization does not mean ending funds rate increases: the median FOMC participant expected three more hikes in 2017 at the time of the March meeting—the same meeting where officials coalesced around a plan to end full reinvestment “later this year”. However, after 2013’s ‘taper tantrum’, policymakers will likely want to move carefully around the start of balance sheet normalization, and will probably take at least a brief pause from funds rate hikes when that process gets underway. As a result, the Dollar has not benefited as much as we might have thought from hawkish communication about the funds rate in recent months. After the surprising decline in the Core CPI in March and in light of the discussion in policy circles about “opportunistic reflation”, the tone from Fed officials looks unlikely to change soon—and the medium-term outlook for policy is increasingly clouded by the Fed Chair transition next year.
In recent years we have generally maintained a bullish Dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the UK and Euro area. In the near term the Dollar could gain if the Trump Administration makes progress on fiscal stimulus or if the Front National wins the upcoming presidential election in France. However, a number of fundamentals have changed on the margin, such that the long-Dollar story no longer warrants a place among our ‘Top Trades’. In addition to closing these two recommendations, we are putting the remainder of our foreign exchange forecasts under review.