Goldman Sachs: Stay Short; Near-Term Outlook Likely To Pivot On Payrolls

Goldman Sachs note that "after appreciating in Q1 2020, the broad USD turned lower, and major USD indices now sit close to the low end of their post-'14 ranges. Leadership of the USD sell-off has shifted over time, but recently has been led by the CNY, which gained about 1% vs the greenback over the last week."

• "We expect trend USD depreciation to continue, due to the currency's high valuation, a long period of low nominal & real short-term interest rates, and increasingly competitive asset market returns overseas. Our current preferred expression remains long EUR/USD, due to the Euro's domestic positives. Over the near-term the USD outlook will likely pivot on Friday's nonfarm payroll report. Fed communication on asset purchases has shifted slightly. For instance, San Francisco Fed President Daly said Tuesday that the central bank was "talking about talking about tapering"; at the press conference following the April 27-28 FOMC meeting, Fed Chair Powell had said that discussion was premature ("no, it is not time yet"). Openness to beginning the conversation on asset purchases (which will presumably take a few months), suggests incoming labor market data could affect expectations for the timing of tapering and eventual rate hikes. According to the New York Fed's surveys of primary dealers and other market participants, consensus expectations are for tapering to begin in Q1 2022 (possibly announced in December 2021). On a stronger-than-expected employment report we could envision those expectations pulling forward, potentially stalling the USD sell-off, at least temporarily. On a weaker-than-expected employment report we would expect broad USD weakness to continue into at least mid-year."