Goldman Sachs has six trades designed to capitalize on its forecast for faster economic growth and a stronger dollar, coupled with more uncertainty.
According to a Goldman note issued on Friday, global economic growth will likely accelerate, spurred by fiscal stimulus across the world and continued quantitative easing from the European Central Bank (ECB) and the Bank of Japan (BOJ), but offset by more uncertainty in politics and on Federal Reserve tightening.
That was likely to spur a stronger dollar and higher inflation across developed markets, as well as better fundamental support for select emerging markets, the bank said, adding that European dividends were set to outperform.
Goldman suggested six trades to play those themes.
1. Go long the dollar against the euro and the pound to play the divergence in economic performance as well as the political risks on both sides of the pond.
"While the solid shape of the U.S. economy and the prospect of some fiscal stimulus make a more compelling case for a tighter stance of monetary policy and a stronger dollar over the coming months, the recent political gyrations in Europe will continue to weigh on euro and sterling," the bank said. "Brexit negotiations in the U.K. have not yet started and uncertainty around the outcome remains elevated."
Goldman said it did not believe sterling was cheap yet, with a 25-40 percent drop from pre-Brexit levels needed to rebalance the U.K.'s external position. The U.K. has a large current account deficit of around 6 percent of gross domestic product (GDP); that must be financed with money from overseas, which may further pressure sterling.
At the same time, uncertainty over upcoming elections in euro-area countries will weigh on the single-currency, according to the note.
In a separate note dated Sunday, Goldman lowered its sterling forecasts to 1.20, 1.18 and 1.14 on a three-, six- and 12-month basis respectively. The sterling was fetching $1.2349 at 9:27 a.m. HK/SIN.
It also set its 12-month target for the euro at $1.00. At 9:28 a.m. HK/SIN, the euro was fetching $1.0602.