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.
“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.”