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Goldman Sachs Expect Stronger USD For Longer As Election Approaches

USD
  • Goldman Sachs believe the USD will stay in this “stronger for longer” dynamic over the next few months. The basic principles of their view remain unchanged, that being US assets set a high bar to beat, and structural issues in the key “challengers” make it hard for the Dollar to move back towards fair value on a broad basis.
  • Bolstering the greenback support is the approaching US election. More protectionist or inflationary policies present an upside risk and are a clear source of discrete market uncertainty. In this context, GS think portfolio flows will be less responsive to the shifting growth outlook.
  • More balanced global growth should, eventually, gradually weigh on the USD’s high valuation, consistent with GS forecasts. However, they think the bar is higher for the Dollar to break to the downside before the election uncertainty clears and confidence grows in the global outlook. That is one reason why Goldman’s USD forecasts are a bit stronger in the near term than their more benign risk outlook might suggest.
  • GS think a number of US election outcomes could lead to a stronger greenback, especially against currencies that are sensitive to more protectionist or inflationary outcomes (like CNH or JPY), but it appears that markets have not yet begun to price these risks like what happened in MXN in 2016. However, there are some signs that similar dynamics are at play.
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