A week ago, we ran a post called “3 Weeks Later, Goldman Thinks ‘Fuck It’ Probably Still Best Way To Think About USD.”
A couple of people apparently didn’t like our title. Can you guess what our response to those people was? If you need a hint, read that title again.
Anyway, the point was that after closing out two of their top long USD trades earlier this year (long USD versus EUR and GBP, and long USD/CNY via the 12-month NDFs), the bank moved to “dial down” their outlook for the greenback against G-10 crosses.
That was one of those notes that didn’t make for the most exciting of reading, but was nevertheless worth your time because whether Goldman was muppetizing folks with it or not, there were some good points in there and some worthwhile visuals.
Well needless to say, the drama that’s unfolded in Washington since then (again, that was a week ago) hasn’t done the dollar any favors. As noted here and everywhere else, the dollar has now erased all of its post election gains.
So given all of that, Goldman felt compelled to follow up on their recently revised outlook and unsurprisingly, their forecast is even more dire than it was before. More below…
Political uncertainty is clouding the dollar outlook. Long-simmering questions about Russian interference in the US presidential election and possible contacts with the Trump campaign reached a boiling point in the last week, following the firing of FBI Director James Comey and the naming of former director Robert Mueller III as a special counsel to oversee the investigation. In light of the high degree of uncertainty around the outcome of the investigation—and the likelihood that it will consume policymakers’ time and energy for some months—the prospects for progress on the Administration’s economic agenda, at least over the near-term, look quite dim. We recently revised down our forecasts for the trade-weighted US dollar, but the latest developments in Washington have introduced additional downside risks. A longer-than-expected period of political uncertainty would likely reduce the likelihood of fiscal stimulus and other dollar-positive aspects of the Trump agenda, with possible implications for Fed policy as well. Until the fog clears, we expect that the dollar will struggle to find its footing.
There are other FX opportunities which are likely to remain less correlated to US political developments. On the G10 side, these could include: (i) long the Canadian dollar, which has underperformed its normal relationship with oil prices, and for which investor sentiment seems overly bearish following recent mortgage market news; (ii) long the New Zealand dollar against Australia on the basis of the marked difference in macro performance in recent months; and (iii) long the Swedish krona vs. the euro, as recently discussed in detail here by Silvia Ardagna. Within EM (iv) a long position in THB relative to KRW remains well supported from a valuation and macro standpoint as we have discussed and (v) we would re-iterate a preference for PLN versus HUF given a persistent strong undervaluation signal in Poland and a central bank that is probably more willing to tolerate FX appreciation.