Goldman Sachs is unconvinced about the dollar on ‘blue wave’ prospects and vaccine outlook

Goldman Sachs (GS) in a Friday note to investors said they doubted the most dollar-positive outcome when the year finally ends.

In its Friday note to investors, Goldman Sachs recommends short-positions against the U.S. dollar, warning that there are possible risks that could arise from vaccine trials, and the U.S. elections may take an unexpected turn. Goldman sees a possibility of President Donald Trump emerging victorious, and further delay to any substantial coronavirus vaccine.

While the financial firm is in doubt about the possibility of any coronavirus vaccine soon, drugmaker Pfizer anticipates a “conclusive readout” from its third phase COVID-19 trial by the end of this month. Another pharmaceutical, Moderna has also indicated that by November, the first interim analysis of its phase three trials would be available.

According to Zach Pandl, co-head of Global FX, Rates, and EM Strategy if the vaccines turn out to be “highly effective” the results could trigger an emergency approval from the FDA by the end of the year.

“To be sure, there are important risks: we are most uncertain about the length of the vote count (especially for the Senate) and the equity market reaction to a ‘blue wave’. But the wide margin in current polls reduces the risk of a delayed election result, and the prospect for near-term vaccine breakthroughs may provide a backstop for risky assets,” said Pandl.

Pandl’s team also pointed out that there is another risk of having vaccines that are less effective than expected. As a result, the recovery timeline will be pushed back nearly one quarter, due to a large number of vaccines in development.

With these risks indicating a dollar-negative fourth quarter, Goldman is recommending two-dollar short trades. This way, investors will be able to sell their currencies and buy them back at lower prices.

Pandl’s team also recommends investors to go for a volume-weighted basket of the Mexican peso (MXN), Indian rupee (INR), South African rand (ZAR); a separate equal-weighted basket of the Aussie dollars (AUD), Canadian dollars (CAD), and euros (EUR).

“In our view, a ‘blue wave’ U.S. election and favorable news on the vaccine timeline could return the trade-weighted Dollar and DXY index to their 2018 lows,” said Pandl in conclusion.

Last week, the financial firm said the ‘blue wave’ would boost the U.S. economy, as a Democratic sweep would cause an increase in corporate taxes.

“All else equal, such a blue wave would likely prompt us to upgrade our forecasts,” said Goldman’s chief executive, Jan Hatzius. “The reason is that it would sharply raise the probability of a fiscal stimulus package of at least $2 trillion shortly after the presidential inauguration on January 20, followed by longer-term spending increases on infrastructure, climate, health care, education that would at least match the likely longer-term tax increases on corporations and upper-income earners.”