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20 Nov 2014
Markets between recovery and divergence – GS
FXStreet (Barcelona) - The Goldman Sachs Research Team see USD in middle of a sustained period of strength and further weakening of the EUR and JPY, monetary policy divergence continues.
Key Quotes
“The story in common currency (Dollar terms) is different, however. Probably our strongest asset market view is that the USD is in the middle of a sustained period of strength and we see further significant weakening of the EUR and JPY in particular, as monetary policy divergence continues.”
“We still forecast EUR/$ to reach 1.15 in the next 12 months but now forecast $/JPY to move to 130 over the same period, with further depreciation beyond. This means that, on an unhedged basis, non-US markets may see significant erosion of their returns from FX, as they did in 2014.”
“Viewed through that lens, it is less clear that non-US markets will outperform significantly. The arguments for currency hedging thus seem particularly strong, especially as carry is positive in several key markets.”
“While USD strength against the majors is the most important part of our FX forecast, we expect that strength to be relatively broad-based, as it was in 2014. To a large degree, that reflects a widening gap between shorter-dated yields in the US and many other economies, as the Fed heads towards exit while other central banks continue to ease.”
Key Quotes
“The story in common currency (Dollar terms) is different, however. Probably our strongest asset market view is that the USD is in the middle of a sustained period of strength and we see further significant weakening of the EUR and JPY in particular, as monetary policy divergence continues.”
“We still forecast EUR/$ to reach 1.15 in the next 12 months but now forecast $/JPY to move to 130 over the same period, with further depreciation beyond. This means that, on an unhedged basis, non-US markets may see significant erosion of their returns from FX, as they did in 2014.”
“Viewed through that lens, it is less clear that non-US markets will outperform significantly. The arguments for currency hedging thus seem particularly strong, especially as carry is positive in several key markets.”
“While USD strength against the majors is the most important part of our FX forecast, we expect that strength to be relatively broad-based, as it was in 2014. To a large degree, that reflects a widening gap between shorter-dated yields in the US and many other economies, as the Fed heads towards exit while other central banks continue to ease.”