Top Goldman Trades See Dollar Rising With Inflation Outlook

  • Bank favors greenback against euro and yen, also likes ruble
  • Euro traded below Goldman's predicted level for most of 2015

In Goldman Sachs Group Inc.’s vision of 2016, the dollar climbs, U.S. inflation expectations pick up and the currencies of Mexico and Russia advance.

The U.S. investment bank recommended buying the greenback against the euro and yen when it published its top trades for next year on Thursday.

The calls come after the U.S. currency rose versus all its major peers in 2015 as the Federal Reserve moved closer to raising interest rates, and the European Central Bank and Bank of Japan continued to add monetary stimulus.

“The divergence between the Fed and both the ECB and BOJ will continue to be one of the more durable themes of 2016,” the strategists, led by Francesco Garzarelli, co-head of macro and markets research in London, wrote in an e-mailed report. “Currencies are particularly sensitive to this divergence pressure and, despite the strength we have seen so far, we believe the dollar has more room to appreciate versus the euro and yen.”

Inflation Bonds

Among its six top ideas, Goldman’s strategists said investors should buy U.S. inflation-linked bonds over their conventional equivalents and recommended buying the Mexican peso and Russian ruble against South Africa’s rand and Chile’s peso.

Last year, New York-based Goldman projected the euro would fall to $1.15 over 12 months and advised clients to use an option strategy to capitalize on the move. The common currency has traded below that level for most of the year and overshot Goldman’s prediction by sliding to a 12-year low at $1.0458 in March. It was at $1.0735 as of 3:02 p.m. New York.

Another of Goldman’s top trades last year was to sell the Swiss franc against the Swedish krona. That call was abandoned on Jan. 15 after Switzerland’s central bank unexpectedly removed its currency cap, sending the franc surging higher against all of its peers.

This year’s suggestions also include trades that benefit from tighter spreads between Italian and German bonds. Specifically, the bank notes that the market pricing for the difference between the five-year German and Italian yields, five years in the future, is around 150 basis points, while the current spread difference is just 50 basis points.

Goldman sees the spread tightening to 100 basis points as an extension of ECB asset purchases and improving economic prospects should benefit Italy.

Break-even Rate

Goldman predicts the U.S. 10-year break-even rate, which measures the difference between yields on 10-year inflation-indexed securities and nominal equivalents, will jump to 2 percentage points. It says the trade “represents an opportunity to take the other side of too-pessimistic expectations” for prices. The break-even rate was at 1.59 percentage point on Thursday, after touching the lowest since 2009 in September.

The bank’s strategists last year recommended an interest-rate options strategy that sought best profits if the 10-year Treasury yield was above 3 percent yet below 3.5 percent by the end of June 2015 and didn’t fall below 2.24 percent. The 10-year yield traded between 1.65 percent and 2.5 percent in that period.

In equities, Goldman recommended betting on large U.S. banks to outperform the general market and, in emerging markets, buying non-commodity exporters against banks.

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