Goldman Cops to Misstep on Dollar Call, Eyes Yen Trade Instead
(Bloomberg) -- Goldman Sachs Group Inc. was half right about what it expected to happen with a more dovish-sounding Federal Reserve. But that didn’t save its U.S. dollar trade -- so it’s trying a different tactic.
The firm’s recent recommendation to short the U.S. Dollar Index (DXY) hit its stop -- the level at which a trade is halted so losses don’t become too great -- at 97.50 on Thursday, in the aftermath of the European Central Bank meeting. That’s a potential loss of 1.4 percent, Goldman strategists led by Zach Pandl wrote in a note late Friday.
Now, they’re making a more tactical suggestion: to short the dollar versus the Japanese yen.
The DXY trade was opened right after Fed Chair Jay Powell’s speech in early January that appeared to indicate a shift in policy trajectory. That change has played out basically as Goldman expected, yet at the same time, growth in other major economies has surprised to the downside and other central banks have gotten more dovish, the strategists said. The combination kept the dollar relatively higher than it might have otherwise been -- something President Donald Trump has recently been frustrated about.
In hindsight, the Fed view probably would have been better expressed in rates than FX, the strategists added.
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“The main beneﬁciary of the current data backdrop seems likely to be the yen,” the Goldman strategists wrote. “We continue to expect dollar weakness, but even if incoming data cooperate this may take time to materialize on DXY (with its high euro weight) due to market pessimism about global growth.”
The Fed “has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy,” Powell said in a speech late Friday that’s consistent with the central bank’s commentary since the start of the year.
However, the DXY, which tracks the general international value of the dollar but is 58 percent weighted to the greenback’s relationship with the euro, reached its highest level in 2019 on Thursday after the ECB cut inflation and growth forecasts and said it was adding accommodation.
Meanwhile, strategists, economists and fund managers have continued to publish positive yen commentary. Even Bank of Japan Governor Haruhiko Kuroda was obliged to comment on the implications of a stronger yen after a number of former BOJ officials warned about its rise. If the heady rally in global stocks that started 2019 is fading, that could boost demand for safe-haven assets like the yen.
Goldman’s new trade recommendation is a tactical short on the U.S. dollar/Japanese yen cross targeting 108, it said in the report. That level was last seen by the pair on Jan. 14, and aligns with economists’ forecasts for year-end compiled by Bloomberg. The cross ended Friday at 111.16, so the dollar would have to drop a relative 3 percent to reach that goal.
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