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Goldman Bets That Aussie and Loonie Are Ripe for Gains in 2021

Goldman Bets That Aussie and Loonie Are Ripe for Gains in 2021

Goldman Sachs Group Inc. strategists are telling clients to bet on gains in the Canadian and Australian dollars as prospects for a global recovery favor cyclical assets.

A rise in demand for commodities like oil and copper should benefit the two currencies the most among Group-of-10 counterparts, analysts including Zach Pandl wrote in a report outlining top trades for 2021. Their base case sees approval of a coronavirus vaccine this year, while accommodative monetary policy will be supportive of risk assets.

Both the Aussie and loonie have posted double-digit gains from lows in March as central banks slashed interest rates and boosted stimulus to quell the pandemic-induced market turmoil and shore up economies. But the rally has sputtered as markets assess prospects for recovery amid signs of progress in finding a vaccine while governments tighten restrictions to contain a resurgence in virus cases.

Goldman Bets That Aussie and Loonie Are Ripe for Gains in 2021

“The biggest risk to this trade is that broader and deeper lockdowns may temper optimism about the cyclical recovery,” the analysts wrote. “But given our baseline forecasts and our belief that markets have yet to fully price in our constructive outlook,” they reiterated their recommendation to short the dollar against an equally-weighted basket of the loonie and Aussie.

In addition, the policy backdrop should remain favorable for risky assets with interest rates on hold and continued quantitative easing, combined with more fiscal stimulus likely in the U.S. — albeit smaller than expected under a ‘blue wave” scenario,’ the analysts wrote, referring to dwindling expectations of a Democratic sweep of the presidency and Congress.

The loonie fell for a third day on Thursday, pulling back from a two-year high earlier this week, as global risk sentiment waned. Canada is struggling to contain a second wave of the virus, with Ontario reporting record new cases Thursday, and major cities are in some form of lockdown. The Bank of Canada pledged at its policy meeting last month to keep interest rates at historical lows for the next few years.

The Reserve Bank of Australia cut its interest rates to 0.10% from 0.25% during its policy meeting on Nov. 3 and also announced a A$100 billion government bond buying program in a bid to pull the economy from its first recession in almost 30 years. The Australian dollar slipped for a second day on Thursday, paring this month’s gain to 3%.

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Goldman’s 2021 Top Trades Span Bets on Canada Dollar, High Yield

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