Following disappointing jobs data last week and the ensuing uptick for the greenback, Goldman Sachs has said the dollar has reached a bottom from the perspective of the U.S. Federal Reserve.
In a note late Tuesday on the performance of the greenback, Goldman Sachs said last week's disappointment on payrolls offers an important insight on positioning.
Even though the data was weaker-than-expected, the dollar rose marginally in the minutes after the release. A surprise move considering that disappointing data usually increases the chances of a central bank being more dovish.
"This is a testament to just how low expectations have fallen with respect to U.S. growth and the Fed," the note said, adding that short dollar positioning is now the most sizeable since early 2013.
The April employment report released on Friday showed creation of 160,000 jobs for the economy, with the unemployment rate at 5 percent. This is was much lower than the Thomson Reuters forecast of 202,000. The weakness in the data has led to analysts questioning the timing for the next Fed rate hike.
Goldman Sachs recently trimmed its expectations for Fed hikes, dropping the June hike for next month and removing a March hike from 2017.
"Overall, their hiking profile is therefore 50 basis points less over the next 18 months, though it remains the case that the cumulative tightening they foresee by end-2017 (125 basis points) dwarfs what interest rate futures now price on that horizon (35 basis points)," the bank said.
From a dollar index perspective, which measures the currency against a basket of other major currencies, Goldman Sachs expects a rise of 15 percent over the next two years as U.S. monetary policy is normalized. However, the bank also warned that other central banks such as the European Central Bank and the Bank of Japan (BOJ) have played a much bigger role in the dollar's weakness of late as compared to the Fed.
"The Fed has been something of a sideshow for the dollar recently. After all, it was the decision by the BOJ not to take action last month that set in motion that last round of dollar weakening. The yen and the euro strengthened sharply, giving rise to the latest round of dollar weakening," the bank said explaining that it expects the BOJ to pursue aggressive balance sheet expansion.
"We therefore see as our highest conviction view on a 3- to 6- month horizon. We do not have the same conviction with respect to euro/dollar downside."
On the ECB, Goldman Sachs thinks market participants has been disappointed twice before. The note says that while the ECB's objective is not to fulfill market expectations, it is unable to ease in an effective manner due to the disagreements over the path of policy within the institution.
The dollar index was down 0.22 percent against a basket of currencies on Wednesday morning. It dipped after six straight days of gains, dragged down by flat performance for equities and the commodities market.