Goldman Sachs says buy dollar, US 'breakevens' as top trades

[LONDON] Goldman Sachs Group Inc recommended buying the dollar against the euro and yen and said investors should buy US inflation-linked bonds over their conventional equivalents, as it published its top trades for 2016.

The recommendation comes after the US currency rose against all its major peers this year as the Federal Reserve moved closer to raising interest rates, and the European Central Bank and the Bank of Japan eased monetary policy. Goldman strategists also recommended buying Mexico's peso and Russia's rouble against South Africa's rand and Chile's peso.

"The divergence between the Fed and both the ECB and BOJ will continue to be one of the more durable themes of 2016," the strategists, led by Francesco Garzarelli, co-head of macro and markets research in London, wrote in an e-mailed report. "Currencies are particularly sensitive to this divergence pressure and, despite the strength we have seen so far, we believe the dollar has more room to appreciate versus the euro and yen."

Last year, the bank projected the euro would fall to $1.15 over 12 months and advised clients to use an option strategy to capitalize on the move. The common currency has traded below that level for most of the year and overshot Goldman's prediction by sliding to a 12-year low at $1.0458 in March. It was at $1.0686 as of 2 p.m. in London Thursday.

Goldman sees the US 10-year break-even rate, which measures the difference between yields on 10-year inflation-indexed securities and nominal equivalents, jumping to 2 percentage points. It says the trade "represents an opportunity to take the other side of too-pessimistic expectations" for prices. The break-even rate was at 1.61 percentage point as of 1:55 p.m. London time.

BLOOMBERG