In a note over the weekend, Goldman Sachs gave its latest currency advice. Investors should start shorting the US dollar. They noted that some currency crosses are attractive enough to short the dollar. This includes positions on the Mexican peso, Indian rupee, and South African rand. Shorting involves selling a borrowed asset, which can be a stock or currency. The strategy involves waiting for the asset to depreciate. By then, you can buy it at a lower price later and pay for your loan.
According to the financial firm, the US dollar may fall to 2018 lows due to many factors. Among them is the likelihood of a Democrat win in the U.S. elections. Also, the coronavirus situation in the US is improving while approval for vaccines.
Goldman strategist Zach Pandl wrote: “The risks are skewed toward dollar weakness, and we see relatively low odds of the most dollar-positive outcome — a win by Mr. Trump combined with a meaningful vaccine delay.” The other scenario involves Joe Biden winning, plus good news on the vaccines. If this happens, the trade-weighted dollar and DXY index will go down to their 2018 lows.”
The ICE US Dollar Index has dropped over 3% in 2020. Low-interest rates and a flood of stimulus money have weakened the dollar. Investors have grown hesitant with the dollar, as it crept a little over the 93 levels. Analysts see the dollar dropping further 4% to 89 levels, which was 2018’s lowest.
Goldman also suggested the euro, Canadian and Australian dollars. The yuan, which went weaker against the dollar Monday, is another long recommendation.
Goldman Previously Shorted the Dollar in June
Last June, Goldman Sachs also shorted the dollar for a stronger Norwegian krone. The economic recovery of the US at the time induced investors to shift to the stock market.
Norway’s geography and healthcare system helped fight the initial ravages of coronavirus. It also limited outsized borrowing or policy limits. Instead, it took in cash from foreign investments. This made the krone better equipped to withstand currency hits due to the pandemic.
Meanwhile, the US suffered through wave after wave of outbreaks. The premature reopening of stores led to reinfections all across the country. The Federal Reserve lowered rates to near-zero levels to combat inflation. This led investors to move from the dollar to stocks. Add to that large-scale borrowing and a stalled economy.
Chinese Yuan Finally Drops After Months of Rallying
After months of strengthening, the Chinese yuan fell on Monday. China’s central bank changed the 20% risk reserve ratio for traders to zero. This decision seemed like a way to help traders short the yuan and help stabilize it. Last week, the yuan rose 6.69% the dollar, which is an increase of about 1.4%.
Last weekend, China’s People’s Bank cut the forex risk reserve ratio for forwarding contracts to zero. With the decision, banks no longer have to hold 20% of sales for contracts. This helps lock in the exchange rate for the sale of a currency on a future date. Now, banks no longer have to do so. This opens the floodgates for investors to short the stock when opportunities present.
Analysts think that this move is China’s way of slowing down the growing strength of the yuan. Rohit Garg, director at Bank of America Merrill Lynch said: “Overall, what this tells us is that … they’re definitely trying to give a signal that maybe they’re unhappy with the current pace of appreciation.”
The Central Bank of China may also be giving onshore corporations some sort of aid. They seem to provide a hedge option against “any sort of dollar strength that can happen on the back of any sort of uncertainty that will be coming up in the next one and a half months,” Garg said. Markets are watching developments on the U.S. election.
Short selling, while completely ethical and above board, is sometimes frowned upon. Critics say it creates undesirable and excessive fluctuations, and an unstable market is bad for the economy. Defenders say it helps keep companies in line and force them to operate effectively.
Watch this as Goldman Sachs bet against the dollar as economies reopen and opted for Norway’s krone:
Whatever your belief is, a window to short the US dollar is now opening. And its success is mostly based on the outcome of the elections. Do you make investments based on shorting the dollar? Did you make a profit out of it? Share with us your stories on shorting the greenback on the comment section below.