Goldman Sachs Global FX Trader: Supply in the Balance
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Goldman Sachs examines how the energy supply shock driven by Middle East conflicts is reshaping global foreign exchange markets. Despite the prolonged conflict, high-frequency activity indicators remain surprisingly resilient, suggesting global supply elasticity may be higher than GDP forecasts imply. This indicates markets might be overly pessimistic on cyclical currencies like the Australian dollar and overly optimistic on the US dollar.
The energy shock affects currencies through terms of trade. The Brazilian real stands out as the strongest performer year-to-date, benefiting from improved terms of trade, risk asset rebounds, and high carry. Goldman Sachs lowered its USD/BRL forecasts to 4.90, 5.00, and 5.00 for the 3-, 6-, and 12-month horizons. Conversely, the British pound faces downside risks due to its energy import profile, while the Canadian dollar shows relative resilience but is capped medium-term by USMCA uncertainty.
The Indian rupee and Southeast Asian currencies remain pressured by elevated oil prices. Following a roughly 10% devaluation post-conflict, Goldman Sachs sees a compelling opportunity to go long on the Egyptian pound, targeting a 6% total return with a 3% stop-loss. This trade is supported by high carry, adequate central bank reserves, and deep undervaluation.
Furthermore, the report highlights that real interest rate differentials are becoming more critical drivers of currency movements than nominal rate differentials.