Goldman Sachs is out with its trades for 2016 and on the top of the list is an FX recommendation to long USD vs both EUR and JPY. While the trade is meant to be a strategic position through 2016, GS also likes it tactically going into the ECB and Fed December meetings.
The following is GS’ rationale for this trade along with its EUR/USD and USD/JPY targets.
1- The Strategic Case:
“We target 10% upside and have a stop of -5%. This trade is a clear expression of the monetary policy divergence between the major central banks that we expect to be a durable theme for 2016. The key plank of our bullish USD view is that monetary policy divergence between the major G10 central banks will continue well into 2016.
As the US approaches full employment, the FOMC in the US is preparing to exit zero policy rates, while central bankers in the Euro area and Japan are likely preparing to extend monetary stimulus,” GS argues.
2. The Tactical Case:
“Tactically, we also like this trade into December, a month that is almost certain to see both ECB easing and Fed tightening in our view. We think our economists’ expectations for ECB easing – a combination of a 10bp deposit rate cut and a 12-month extension to the ECB’s asset purchase program relative to the current September 2016 baseline – will be EUR negative, particularly against the backdrop of the Fed’s first hike since 2006. Additionally, we think all BoJ meetings from here are ‘live’, though more specifically think the odds are rising of easing at the January meeting when the BoJ next publishes its Outlook Report,” GS advises.
EUR/USD, USD/JPY Forecatst:
“Our 12 month forecast for EUR/$ remains 0.95, but we think the odds are good that this level is reached sooner given the potential for the ECB to ease aggressively in December. For $/JPY, our 12 month forecast remains 130, a level that could again be reached sooner,” GS projects.