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Goldman Sachs on the outlook in the forex market for 2020

Goldman Sachs outlook for currencies in the year ahead

Some themes from Goldman Sachs’ 2020 outlook for currencies in 2020:

  • There are plenty of big picture reasons to dislike the US dollar but they don’t see a significant short opportunity, at least for 2020
  • The next big move in the euro will probably be higher
  • The pound should break out on a Conservative election win and is their favorite currency for Q1

On the dollar, Goldman Sachs believes that strong domestic fundamentals will balance flows out of USD and into emerging market currencies on better global growth. They see a 1.5-2.0% drop in the dollar next year.

Risks to the dollar are arguably skewed to the downside, and we would pivot to a more bearish outlook if we were to see (i) a more robust recovery in the Euro Area, (ii) a bigger rollback of tariffs on China, and/or (iii) more rate cuts from the Fed. 

On the euro, they note that their model shows the euro 15% undervalued and that positioning in shorts is overcrowded. However they aren’t confident that a turn is coming soon and forecast a rise to 1.15 in 12 months.

In cable, they expect a deal dividend to push it to 1.35 in three months and 1.37 in 12 months.

There have already been large inflows as the probability of a cliff edge exit diminished over the last couple months, but this has barely dented the overall picture of a material Sterling underweight

They highlight the flows with this chart:

Goldman Sachs forecasts FX

For the yen, they note that it has been the best performer in the past 12 months with a 3.7% return. For the year ahead they see another 1% but believe the yen makes for a great recession hedge. However for the next three months they see the yen underperforming as risk rallies on a China-US phase one deal.

Other Goldman Sachs forecasts:

  • See a strong upside case for the Swedish krona, particularly against the euro
  • They are most-negative on the Swiss franc
  • They see a positive case for NZD against AUD and USD
  • See CAD broadly range-bound versus USD
  • They like the LatAm region and believe MXN is the best bet

 

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