Goldman Sachs is closing two long-dollar "top trade" calls, both of which would have posted losses, the bank said in a note on Tuesday.
"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 U.K. and euro area," the note said. "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.'"
The trades, which it initiated in mid-November, were a long dollar plays against the euro and the pound as well as going long the dollar/yuan via a 12-month non-deliverable forward (NDF), Zach Pandl, a senior U.S. economist at the bank, said in the note.
The euro and pound trade had a potential return of negative 0.2 percent, with modest carry gains offsetting a spot return of negative 0.6 percent, while the yuan trade had a potential loss of 1.1 percent, Pandl said.
He cited three reasons that the trades didn't work out, adding that he expected all three would remain dollar headwinds.
First, global economic growth had picked up, reducing the U.S. economic outperformance, he noted, citing gross domestic product (GDP) forecasts for G-10 countries since the U.S. presidential election in November.
"Although forecasters have marked up their U.S. growth expectations over this period, the changes have been more modest than for other economies, including the U.K. and Euro area," he said.
He also noted that there's been uncertainty about the true pace of activity in the U.S. after first-quarter estimates, as well as the new administration's "slow start" on tax reform and infrastructure spending.
"Meanwhile, China has expanded fiscal and credit policy, lifted domestic interest rates, and closed the capital account—all of which affected our dollar/yuan call," the note said.
Pandl also pointed to U.S. President Donald Trump's recent rumblings on dollar strength.
Last week, Trump said the currency was "getting too strong" in an interview with The Wall Street Journal.
"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," Trump told the paper.
That sent the dollar index, which measures the greenback against a basket of currencies, tumbling.
"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," Pandl said.
The third headwind to a long dollar trade came from less-hawkish expectations for tightening from the U.S. Federal Reserve.
"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," he said, noting Goldman's view is for hikes at the June and September meetings and for a "balance sheet normalization" announcement in the fourth quarter.
Source: Bloomberg
Jr Trader Alexander Kumanov
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.