Top Trade Recommendations for 2017: Long USD vs GBP and EUR – Goldman Sachs

Research Team at Goldman Sachs suggests to go long US$ equally weighted against EUR and GBP, with a basket indexed to 100, a target of 110 and a stop at 95 as one of their top trade recommendations for 2017.

Key Quotes

“Annual carry on this basket is 1.3%.”

“A building theme in global markets is the populist shift in politics, as evidenced by the Brexit vote in the UK and the recent US elections. In the US, events have moved in a USD-positive direction, between the rising likelihood of fiscal stimulus, more protectionism and immigration controls, all of which add up to a more inflationary mix and tighter-than-otherwise monetary policy setting. In Europe, ongoing uncertainty over the Brexit process will likely weigh on the Pound, while the slew of elections, including the general elections in France, Germany and the Netherlands, will weigh on the EUR.”

“Meanwhile, behind the scenes, divergence in growth and inflation has continued to play out, giving an underlying boost to the Dollar. Markets are debating where populist forces are stronger and more negative – in the UK or the Euro area. Either way, they are material and we think it is best to split the difference, in essence taking out moves in EUR/GBP.  Our first Top Trade consists of going long US$ versus EUR and GBP equally weighted. The position is indexed at 100 with a target of 110 and a stop at 95. As part of this, we are revising our GBP/$ forecast lower to 1.20, 1.18 and 1.14 in 3-, 6- and 12-months from 1.20, 1.21 and 1.25 previously.  This is consistent with our analysis that Sterling needs to fall around 20-40% from pre-Brexit levels. We have kept our call for EUR/$ parity on a 12-month horizon unchanged.”

“The principal risk to this trade is a premature tapering from the ECB, which could cause EUR/$ to rally, but this is not something we anticipate given the difficult political calendar and the fact that the ECB will want, in our baseline case, to shield European rates from the increase in their US counterparts. A risk is also that the triggering of Article 50 is delayed, which could buoy Sterling. That said, UK Prime Minister May has if anything strengthened her rhetoric on this since the US election and her political fortunes are closely tied to moving forward on Brexit at this point. As a result, even if a delay occurs, we think the course is ultimately set.”