Goldman Sachs: Consolidation In Structural Downtrend

Goldman Sachs note that "the case for structural Dollar weakness remains intact, in our view. The currency is overvalued, US real rates will likely remain deeply negative for a number of years, and the global economy should be on a steady upward path out of the coronavirus recession. This is a standard recipe for sustained Dollar weakness. However, over the next few weeks recent consolidation may continue, due to uncertainty around Covid control, the Fed policy outlook, and US politics. First, US Covid case counts have steadily improved this month, mostly reflecting an easing outbreak in the Sun Belt, while case growth has picked up elsewhere, including continental Europe. The better US trends may not continue through school reopening, but could reduce pessimism around domestic growth over the short-term. Second, TIPS yields have started to move sideways as markets have debated the outlook for Fed policy. The annual Jackson Hole conference this week will keep focus on these issues, and the reaction to the latest FOMC minutes suggests markets will be sensitive to any questioning of Fed support for the Treasury market. Third, the Republication National Convention this week could support the Dollar if it results in a tightening of the polls - a view that a Biden Administration would raise US corporate tax rates has likely weighed on the greenback - or if President Trump makes major new announcements on US policy toward China. Investors with relatively short horizons should consider scaling down USD shorts until these events have passed."