Goldman Sachs: Curve Steepening Should Not Change Bearish Dollar Trend

Goldman Sachs note that "the broad Dollar rallied to start 2021, following the Georgia election result and the sharp sell-off in longer-dated US rates. Rising rate differentials may be a temporary headwind to our short-USD recommendations, but we do not see reason to change our structurally bearish views. First, FX markets are more sensitive to changes in front-end rates, which are still pinned down by the Fed's average inflation targeting framework (we are skeptical US fiscal stimulus will lift the Dollar for this reason). Second, while the Fed may be done easing, changes to its asset purchase program are likely a ways off: Vice Chair Clarida said Friday that he did not expect any QE "tapering" until 2022. Third, as a simple empirical matter, the trade-weighted Dollar tends to depreciate slightly when the US yield curve bear steepens; the same goes for the DXY index when the Yen is excluded. We continue to believe that the combination of high Dollar valuations, low nominal and real rates, and a rapid recovery in the global economy will weigh on the greenback throughout 2021, including against EM FX. In G10, we are tightening stops on our short-USD vs AUD and CAD recommendation (opened on October 9)."