2017 is promising to be auspicious for the US dollar with the fiscal stimulus, immigration rhetoric and more protectionism spurring inflation rates and offsetting monetary policy tightening. The greenback should have a good advantage in light of the incoming political reshufflings in Europe, ongoing uncertainty over the Brexit process and potentially ground-shaking Italian referendum. The main risks to this forecast are the ECB monetary policy tapering and a delay in triggering Article 50 to start the actual Brexit.
Trump win will send yuan down
China’s currency is under threat of depreciation in relation to USD. Analysts from Goldman Sachs advise buying the 12-month non-deliverable forward contract. The US dollar is expected to hit 7.07 yuan and then 7.30.
Bet on the emerging market currencies
The GS’s strategists recommend buying an equal-weighted basket of the Brazilian real, Russian ruble, Indian rupee, South African rand against the South Korean won and Singapore dollar. Some of the relatively high-yielding currencies look worn out after the US election amid the selloff of EM assets, making a good time for long positions. Goldman is short on South Korean won and Singapore dollar as this is another bet on weaker China.
Buying opportunities in stock market
The analysts recommend choosing emerging market stocks, which are less vulnerable to China’s economic slowdown. According to the bank, investors should consider buying Brazilian, Polish and Indian markets (an equal-weighted, currency unhedged basket composed of the Warsaw Stock Exchange Total Return Index, the Ibovespa Brasil Sao Paulo Stock Exchange Index, and the NSE Nifty 50 Index targeting a gain of 20% and exiting if the position falls 10% from the present levels).
US Treasuries promise high spreads
Analysts advise investors going long 10-year US bonds. The spread between nominal and inflation-protected Treasury yields is expected to rise to 230 basis points; if it falls to 160, you should exit the market. Strategists are also recommending a version of the same trade for inflation in Europe using swaps. The fundamental reasoning for rising inflation rates in Europe: firm energy prices, the end of austerity measures, central banks might start tolerating the above-target inflation.