Currencies

Goldman Sachs shifts to less defensive currency strategy amid 'tentative stabilization'

Key Points
  • The bank recommended investors go long on Swedish Krona (SEK) against the euro, suggesting that Sweden, as the most open economy in the G-10 (Group of Ten), stands to benefit from improving global growth sentiment.
  • Goldman has opted for "dollar-neutral carry trades" in emerging markets, such as backing the Indonesian Rupiah (IDR) against the South Korean won (KRW), identifying the former as the "most attractive Asian high-yielder."

Goldman Sachs has shifted to a slightly more aggressive stance in its global foreign exchange recommendations amid what it sees as a "tentative stabilization" in global growth and a cooling of geopolitical risk.

In a note to investors published late on Friday, the Wall Street giant said it sees greater opportunities in the global FX market, after major risk events such as a "no deal" Brexit and possible U.S. tariff increases were averted in recent weeks.

"Plus, while incoming data on the global economy have not been great, the timeliest indicators point to a tentative stabilization," Zach Pandl, Goldman Sachs co-head of global foreign exchange and emerging market strategy, said in the note.

But with the U.S. Federal Reserve seemingly hitting pause on its rate cut strategy, a key source of market support, and weak growth in Europe, Goldman is recommending a less defensive mix of FX trades but still does not see a broad weakening of the U.S. dollar.

"That would likely require more evidence of a pickup in global growth, some greater clarity on the path ahead for the trade conflict, and possibly lower US real rates," Pandl added.

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The bank recommended investors go long on Swedish Krona (SEK) against the euro, suggesting that Sweden, as the most open economy in the G-10 (Group of Ten), stands to benefit from improving global growth sentiment. Goldman analysts are targeting a return to July lows for the EUR/SEK pair of 10.50.

Pandl argued that while soft data in Sweden has lagged the recovery elsewhere, this can be discarded due to the Riksbank's apparent intent on a December hike in order to exit negative rates, despite a few mixed signals in the domestic data. He also highlighted that SEK is more closely correlated to economic conditions across Europe than the domestic picture.

Goldman has opted for "dollar-neutral carry trades" in emerging markets, such as backing the Indonesian Rupiah (IDR) against the South Korean won (KRW), identifying the former as the "most attractive Asian high-yielder."

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However, not everyone is convinced by the market commentary suggesting a generally improving investment environment.

Shard Capital's Bill Blain said in a note Monday that he is "unconvinced" and cautioned that "time has been called on this particular era of irrational market exuberance."

"My spidey senses are tingling due to the manner in which events across markets, individual stocks, politics, geopolitics and gut-instinct are connected," Blain said.

"I'm not predicting sudden or massive financial collapse – just a wake up and smell the coffee correction in bonds (which feels underway), and selective deflation in oversold sectors of the stock markets. As always, any reversal will set off wailing and despair, yet most of the critical lessons will be missed," he added.