"The Dollar Rally Is Far From Over," Goldman Insists

Tyler Durden's picture

One reason given for the contention that investors should fade Draghi’s latest “package” is that, to quote Deutsche Bank, “we are one hawkish Fed statement away from a re-pricing.”

The argument is essentially this: the Fed reminds the market that more rate hikes are still in the cards (even if there isn’t one today), that leads to dollar strength, which in turn triggers a renewed downturn in commodities and thus a return to the same dynamics that waylaid markets earlier this year.

Here’s how Goldman put it last week:

While investors focus on oil and the ECB, they overlook the largest current macro market risk – and opportunity – which centers on the Fed. We forecast a tightening Fed and lower oil prices will return upward momentum to the performance of stocks with strong balance sheets.

And here’s Deutsche:

We think we are just one hawkish Fed statement away from a potentially sharp re-pricing of Fed tightening expectations, which would push up real bond yields (as happened after the start of the ECB’s QE program in Mar 2015) as well as the dollar. Any drop in commodity prices would risk putting renewed upside pressure on credit spreads.

Well, as we head into the Fed, Goldman's Robin Brooks wants you to know that “the dollar rally is far from over,” thanks to a Fed that will be more hawkish than the market anticipates:

We expect the Fed to signal that it wants to continue normalizing policy, which means three hikes this year and four in 2017, with the statement referring to the risks as “nearly balanced,” reverting to phraseology used in October, just before December lift-off. Overall, our sense is that the outcome will be more hawkish than market pricing, in particular given that the FOMC may leave open the option of tightening at the April meeting.

And that means there’s as much USD upside now as there was 2 years ago, despite the rally since then:

Much as in April 2014, we can estimate the potential for Dollar upside if the 2-year rate differential moves in line with our forecasts for G10 policy rates. As Exhibit 2 shows, this implies that the 2-year differential could be between 120 bps and 150 bps higher than its current level, depending on whether we use the spot or 2-year forward differential. This translates into potential Dollar upside of between 10 percent and 15 percent, i.e., similar to the kind of estimates we had almost two years ago. It might seem puzzling that the potential for Dollar strength is largely unchanged, even though the Dollar has obviously appreciated a lot. Intuitively, this is because monetary policy normalization has really only begun, in addition to rates markets taking a very dovish view relative to our expectations for Fed tightening.



Or, in summary, Goldman doesn't think the market knows what it's talking about when it comes to what the FOMC is pondering in terms of the "flight path" for rates: 

Implicitly, our estimates for Dollar strength are largely a reflection of the divergence between our Fed call and what markets are pricing. And there is admittedly a genuine tension there

Right. And given the fact that i) Brooks' calls are generally about as accurate as Gartman's, and ii) Goldman is one for six so far on its Top Trades for 2016, you might want to go with the market's view on this one to avoid getting the muppet treatment. 

But then again who knows because after all, Janet is just as confused as anyone...

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thesonandheir's picture

Goldman have to be right one time at least - don't they??

Haus-Targaryen's picture

I'd love the USD to continue to strengthen.  Would be fantastic! Come on Yellen, prove you have bigger balls than Bernanke, and give us another 25 bps today.

Nutsack's picture
Nutsack (not verified) bamawatson Mar 16, 2016 8:32 AM

As Europe accelerates it's journey into self destruction, one would expect the dollar to rally.

BandGap's picture

Dollar rally just means everything else is sinking.

BandGap's picture

Same shit here in Chicago. Two thugs (15, 17 years old) get offed when trying to rob a liquor store (I think it was their third) and the family shrugs and says "it was a nice try, anyhow". Just reading what was said by the families after these episodes should give anyone enough insight into the current conditions for the poorest families. The same for human life, it just gets in the way of getting what you want. There is no anger or remorse.

Rise of the zombies.

Haus-Targaryen's picture

"How he gonna get hez money?" 

I am not sure, but definitely not robbing someone's house. 

asteroids's picture

"Thow shall not steal" It's a sin. But everyone in power does it. So, that morality is now part of the sheeple mind set. Stealing from your neighbour is now acceptable way of "getting hez money". Makes me want to puke.

The Real Tony's picture

The chances of the U.S. dollar strengthening into the U.S. election are zero. Rates will be cut this year.

Seasmoke's picture

I'm sticking with Hawkish Rates is Bullish for Gold. 

RaceToTheBottom's picture

Once a Muppet, always a Muppet

tocointhephrase's picture

Gold Man Sacks, say no more!

FreeShitter's picture

The beatings must continue until your morale starts to improve.

Last of the Middle Class's picture

1 + 1 = 3.  If you say so.


silverer's picture

A dollar rally, eh?  That's just great news for US exports.  Just great. 




two hoots's picture

Mandates achieved vs global economy (non-mandates)?  CPI/Housing says raise rates 1/4 and continue to watch across the pond.  Markets will not like it until they do.

Davidduke2000's picture

Prepare for 20% down for the US dollar, as each time these GS or any other speculators cheer something, it means pump & dump.


I wold start now dumping US dollars.



RamzaBehoulve's picture

Lol, no wait for the peak (1-2h) following Fed statement, then short. That's extra bonus.

BandGap's picture

I must still be in transition because I cannot believe what I am reading sometimes.

So........to extend the illusion that things are just hunky dory the Fed may raise rates, which will in turn make the current situation even more dire.

Dollar rally? Doesn't it rally just because everything else is falling?

RamzaBehoulve's picture

Commodities downturn? Really? Sure, if Dollar goes up, XAUUSD will go down. However, what about all the other currencies falling vs dollar? What's left to do? Either buy $$ or buy gold.

I don't believe for one second we'll go back below 1100 for Gold, I'm not even convinced we'll go below 1200 for more than 24h and even then, long term gold is the only somewhat safe bet.

lehmen_sisters's picture

Had a friend ask me 2 days ago about bitcoin, i said fuck it. I recommended to go 50% gold/silver....and 50% cash in a coffee can . 

RamzaBehoulve's picture

I went 25/25/50 Bitcoin/Gold/Cash personally, but I'm tech savy and I like the idea of a real Internet currency. I'm sure at least one digital currency will make it to the top. For now it's BTC, but I'll switch as soon as I feel some tech issues are unfixable.

The Real Tony's picture

Commodities don't need the help of a strengthening U.S. dollar to resume their slide to new fifty year lows. This ruse and facade about a recovery has to end shortly after the November election. NIRP 2017 and beyond.

Space Animatoltipap's picture

A $ rally is only another sign of a desperate monetary/economical environment. 

Mat Cauthon's picture

The only reason the Fed raised rates in December was due to global dollar dumping, and a need to save Fed Cred.  You can see they KNEW it would have little real impact by the reactions of the 10yr and 30yr falling, and how the Fed Funds rate only move 8 bps, not 25.

I dont believe they will raise anything again... its all Draghi type Fed speak.  You dont raise rates in a deflationary environment, and even an ivy leaguer Keyenesian knows this truth.

the grateful unemployed's picture

they RAISE, only because its' the right thing to do, normalization though a policy of incremental rate hikes. the Fed should RAISE  here, then give the markets a break this summer. not sure how pro stock market it is, it should achieve the secondary goal of monkey hammering gold down to GOLDMANS 800 target (the bullion banks are all in on the short side) at which time you want to BUYBUYBUY because the dollar gold correlation is like mark to myth accounting. it works until it doesnt. and the fact is that the Feds rate hikes arent' really moving rates, hence the flat to inverted yield curve, so they can raise all they want, its a cover for their mini QE (100B of RRPO makes the medicine go down) the one real positive out of all this is oil prices should firm up when the HY market collapse brings energy back to reality. OH and 3% inflation targer, and a couple victory laps.

Argenta's picture

I guess being the least shitty piece of shit in the overall pile can stretch out the inevitability of fiat failure much longer than I expected.


PleasedToMeatYou's picture

"The Dollar Rally Is Far From Over," Goldman Insists

I have thought this was the case, until I see Goldman publically announcing it.  Now, I'm not so sure. 

marts321's picture

dollar weakness, bitchez

marts321's picture

That old hag Yellen needs to fuck off and die.