The Dollar Bottom – Goldman Sachs
US Economics team of Goldman Sachs on Friday trimmed their expectations
for Fed hikes, dropping the June hike for next month and removing a
March hike from 2017.
Key Quotes
“Overall,
their hiking profile is therefore 50 bp less over the next 18 months,
though it remains the case that the cumulative tightening they foresee
by end-2017 (125 bp) dwarfs what interest rate futures now price on that
horizon (35 bp). Seen from the perspective of our Dollar forecast,
which is for the Dollar to rise 15 percent over the next two years as US
monetary policy is normalized, what matters is the overall hiking
cycle. Here, our Economists have kept their expectation for the terminal
rate unchanged at 3.38 percent, so that their forecast change makes the
hiking cycle a bit slower (by two quarters), but not smaller. We
therefore see some near-term downside risk to our bullish Dollar view,
but less change to the long-run fundamental view.
Last week’s
disappointment on payrolls offers an important insight on positioning.
Even though the data were a material disappointment –the Dollar rose
marginally in the minutes after the release, a testament to just how low
expectations have fallen with respect to US growth and the Fed. This
corroborates the CFTC’s Commitment of Traders report, which shows that
short Dollar positioning is now the most sizeable since early-2013. It
is fairly clear therefore that – from the perspective of the Fed – the
Dollar has reached a bottom.
But, in a way, 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.”
