Goldman Team Wary on Dollar Breaks From Market Full of Bulls
(Bloomberg) -- Goldman Sachs Group Inc. is calling time out on the dollar’s recent rally, pitting itself against a market largely dominated by bulls.
Strategists at the Wall Street behemoth argue the greenback’s recent strength is going to peter out as U.S. economic growth begins to slow, bolstering the case for an extend period of loose monetary policy from the Federal Reserve. The greenback hit a nearly three-week high on Tuesday.
The move has come amid a hawkish tilt from Fed officials and a solid U.S. labor market report, wrong-footing leveraged funds who were short the currency, while opening the way for its ascent. Against this backdrop, strategists from Rabobank to ING and MUFG all see momentum for now, especially as Fed is now seen diverging from other major central banks in paring back stimulus.
Yet for Goldman strategists including Kamakshya Trivedi, the room for appreciation remains limited, citing a slowdown in fiscal spending and inflation that will weigh on dollar again. And it’s a view that will further divide currency watchers ahead of the Jackson Hole symposium later in August, when Fed officials are expected to discuss tapering in more detail.
“We do not see a case for sustained dollar appreciation” analysts including Trivedi wrote in a note. “The U.S. economy should slow as the fiscal impulse turns negative, and falling inflation should allow the Fed to remain on hold for a lengthy period.”
Bloomberg’s dollar spot index has climbed around 0.8% this month, supported by a chorus of Fed officials, which have raised the prospect for stimulus to be dialed back sooner than expected. Meanwhile, bets on central bank divergence are building, with the European Central Bank expected to keep policy supportive, driving the euro to its lowest level against the dollar since April this week.
“The fact that we have significant concerns over the Delta variant in Asia and elsewhere suggests that the USD could pick up some safe haven support,” said Jane Foley, head of foreign-exchange strategy at Rabobank. “This suggests that there is a stronger risk of the euro breaking below the 1.17 level and for USD strength to be more marked into late 2021 and early 2022 than I had anticipated earlier in the year.”
Hedge funds have been caught off guard by the rally since mid-June and are clinging to short positions which they are slowly reducing. Leveraged funds’ net dollar shorts peaked in the week ending July 9 at over 78,000, data from the Commodity Futures Trading Commission show. They have been reduced every week since and now halved from the peak, according to the latest data.
“I think the taper decision, which looks more like it will come in September, may usher in a ‘sell the fact’ slide in the dollar,” said Standard Bank’s Steven Barrow, who sees the dollar topping out at 1.15 against the euro. “I also think that many countries struggling with the delta virus now, like Australia, will get past the lockdowns and the recovery in these countries and currencies could weigh on the dollar.”
Pandemic recovery in many countries “looks like it is going to be moving in the right direction into the fall, which would reinforce the reflation theme and a weaker dollar,” said Toronto Dominion Global FX Strategy Head Mark McCormick in an interview with Bloomberg TV Tuesday. “What’s most important for the dollar, and I don’t think it gets enough traction, is what the rest of the world’s story is.”
All About the Data
The August jobs report bolstered the dollar but low risk appetite and reduced liquidity suggest markets will need additional confirmation in September, wrote JPMorgan Chase & Co. strategists including Paul Meggyesi in a note.
They prefer keeping risk exposure light, with a bias to be long dollars against more dovish central banks like the European Central Bank as well as against some currencies more closely linked to sentiment to hedge against any risk deterioration due to the delta variant.
Morgan Stanley has been among those ahead of the trend and continue to recommend investors hold onto dollars. Their analysts see rising Treasury real yields, which strip out the expected impact of inflation, boosting the dollar. Still, they noted that “risk/reward for a higher USD is not as compelling as it was when we turned bullish in early June,” with the dollar index facing potential technical headwinds around 93.
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