Top 10 Rates, FX & EM Trades For 2017
Goldman Sachs top six trades for 2017!
Summarized, the 6 trades - which are largely a thematic recap of Goldman's top failed trades for 2016 - are the following:
- Top Trade #1: Transatlantic economic divergences and political risks: Long US$ vs GBP and EUR
- Top Trade #2: RMB weakening: Long $/CNY
- Top Trade #3: Earning the ‘good carry’ in EM, hedging the China (and CNY) risk: Long BRL, RUB, INR and ZAR, short KRW and SGD
- Top Trade #4: Long EM equities with insulated exposures to growth: Long Brazil, India and Poland, FX un-hedged
- Top Trade #5: The 'reflation' theme broadens: Long 10-year US$ and EUR inflation
- Top Trade #6: Long equity-like 'carry' with little duration risk through dividends: Long EURO STOXX 50 2018 dividends
Top Trade #1: Transatlantic economic divergences and political risks: Long US$ vs GBP and EUR (See the rest of the trades at the bottom)
Our first Top Trade consists of going long US$ versus EUR and GBP equally weighted. The position is indexed at 100 with a target of 110 and a stop at 95.
A building theme in global markets is the populist shift in politics, as evidenced by the Brexit vote in the UK and the recent US elections.
In the US, events have moved in a USD-positive direction, between the rising likelihood of fiscal stimulus, more protectionism and immigration controls, all of which add up to a more inflationary mix and tighter-than-otherwise monetary policy setting.
In Europe, ongoing uncertainty over the Brexit process will likely weigh on the Pound, while the slew of elections, including the Italian political fallout after the constitutional referendum on 4 December and general elections in France, Germany and the Netherlands, will weigh on the EUR.
Meanwhile, behind the scenes, divergence in growth and inflation has continued to play out, giving an underlying boost to the Dollar .
Markets are debating where populist forces are stronger and more negative – in the UK or the Euro area. Either way, they are material and we think it is best to split the difference, in essence taking out moves in EUR/GBP.
The principal risk to this trade is a premature tapering from the ECB, which could cause EUR/$ to rally, but this is not something we anticipate given the difficult political calendar and the fact that the ECB will want, in our baseline case, to shield European rates from the increase in their US counterparts. A risk is also that the triggering of Article 50 is delayed, which could buoy Sterling. That said, UK Prime Minister May has if anything strengthened her rhetoric on this since the US election and her political fortunes are closely tied to moving forward on Brexit at this point. As a result, even if a delay occurs, we think the course is ultimately set.
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Top Trade #2: RMB weakening: Long $/CNY
Top Trade #3: Earning the ‘good carry’ in EM, hedging the China (and CNY) risk: Long BRL, RUB, INR and ZAR, short KRW and SGD
Top Trade #4: Long EM equities with insulated exposures to growth: Long Brazil, India and Poland, FX un-hedged
Top Trade #5: The 'reflation' theme broadens: Long 10-year US$ and EUR inflation
Top Trade #6: Long equity-like 'carry' with little duration risk through dividends: Long EURO STOXX 50 2018 dividends.
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1. Short US 5y rates – Two and a half Fed hikes priced by the rates market for 2017- 18 are not consistent with aggressive fiscal easing promised by Trump.
2. Short US 10y real rates – After the violent repricing of inflation breakevens, we believe real rates offer better risk-reward to position for higher rates.
3. Buy USD/JPY – With the BOJ pegging 10y JGB yields at zero, we expect this highly interest rate sensitive USD cross will continue to be the biggest beneficiary of the Trump win.
4. Sell a basket of Brazilian, Mexican, and Colombian long bonds – Positioning in EM fixed income market remains crowded while liquidity is poor.
5. Sell BRL/MXN – MXN is oversold but BRL will likely be vulnerable to the divergent paths between Brazil’s easing and the Fed’s tightening cycles.
6. Buy USD call/CNH put – President Trump will need a weak USD, but President Xi needs a weak CNY. We believe risk premium for a collision course is too low.
7. Sell EUR/GBP – Brexit and Trump could bolster the anti-globalization parties in Europe ahead of key elections next year.
8. Sell Eurozone 30y inflation breakevens – We think investors should take advantage of the recent rally to sell into the December ECB meeting, which could disappoint.
9. Sell EUR/RUB – Likely OPEC production cuts on November 30 and possible sanction relief for Russia are bullish for the RUB, in our view.
10. Buy NZD/USD put spread – Spot NZD/USD is forming a head and shoulders top pattern that suggests a decline will follow in 2017.
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