Wall Street Highlights – FX&Commodities

GS have upgraded its Dollar forecasts, expecting the USD to rally by about 5% over the coming year. This expectation is based on solid US growth, continued support for capital inflows, and more protectionist policies. The firm identifies three key factors supporting the USD: the difficulty for FX markets to fully price tariff risks ahead of time, the market's upgrade of the US growth view since the election, and the surprising resilience of the US economy and shifting policy expectations. These factors lead GS to maintain that there is more Dollar strength ahead.

For the British Pound, GS note that the GBP has been the clear underperformer in G10 FX, with a bear steepening and underperformance in UK gilts, characteristic of an acute rise in UK fiscal risk premia. The risk to Sterling is an escalation in the loop of sell-offs in UK assets and a more strenuous fiscal position. However, GS expect some support for the Pound from an eventual recovery in risk appetite, a compression in fiscal risk premia in Gilts, and the visibility of hard growth data reflecting increased government spending and investment in the coming months.

In the Emerging Market FX space, GS emphasize that carry can be a key driver of relative performance in a world where the USD is stronger for longer. Positive carry strategies that are USD-neutral can be resilient to tariff risk and yield positive total returns. Latin America (LatAm) high carry currencies are expected to outperform Asian low-yielding currencies due to the combination of value and carry. GS recommend being long INR versus its Asia low-yielders basket and short EUR/BRL.

For Emerging Market Asia, GS expect USD/Asia to trend higher supported by new trade protectionist measures, continued US exceptionalism, and positive USD versus Asia rate differentials. GS maintain its forecast for USD/CNY at 7.40/7.50/7.50 over the next 3m/6m/12m and adjusts forecasts for other Asian currencies, expecting the KRW to underperform in the short term but with potential for a relief rally.

Regarding the JPY, GS expect the JPY to continue weakening, with US exceptionalism and historically attractive USD carry persisting. The biggest challenge to further JPY weakness would be unexpected US growth concerns and subsequent carry unwinds. However, GS expect a gradual grind higher in USD/JPY, now towards 162 in 12 months.

For the CAD, Prime Minister Trudeau's resignation delays the possibility of a general election in Canada to Q2, removing near-term election risk and potentially raising the probability that the current government lasts through the budget. Given the more focused rhetoric on Canada tariffs from the new administration, GS expect further upside in USD/CAD over the next 3m, revising forecasts to 1.46, 1.46, 1.46 in 3, 6, and 12 months.