USD: Goldman Sachs On Monitoring Downside Risks To Its USD View

Goldman Sachs: "For the broad Dollar, the question on investors’ minds is whether we are heading for a 2017-style repeat. That year saw relatively little change on US tax and trade policy, set against more balanced global growth that was helped by foreign fiscal expansion, and the Dollar had its largest drawdown in the post-GFC era. The parallels to today are clear, and the risk of a repeat is rising. However, there are also clear parallels between today and early 2018—when the US announced new steel and aluminum tariffs, was engaged in testy trade negotiations with Canada and Mexico and preparing to raise tariffs on China. And, there are also important differences. Most prominently, better global growth in 2017 was likely supported by China’s earlier stimulus measures that boosted growth around the region and in Europe. Today, China’s fiscal support is more targeted and less global, and we think the potential for European fiscal stimulus looks more modest. Ultimately, our baseline forecasts are more aligned with the 2018 parallels than 2017. But we continue to monitor the important downside risk to our Dollar forecast that the balance of US policy changes and the foreign response is different than we expect. When we drill down into our forecasts for the individual crosses, these risks fall into five categories: i) tariff changes are smaller or later than we expect, ii) the composition of the tariffs is different, iii) the foreign fiscal policy response is greater, iv) foreign currency management is tighter, and v) the monetary policy response to countervailing growth and inflation impulses is more nuanced. While each of these risks is drawing closer, in different ways, we remain comfortable with our baseline forecasts. As a result, our strongest view is that FX markets appear to be underpricing what we perceive as relatively thick tail distributions that should make Dollar calls attractive for a variety of investor types."