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Goldman Sachs recommended taking short positions against the US dollar, arguing that the risks associated with vaccine trials and elections in the US are biased towards the dollar.
On Friday, in a note to investors, Goldman analysts said they saw «low chances» the most positive result for the dollar by the end of the year. They called it a presidential victory Donald Trump combined with a significant delay in vaccination progress.
Democratic contender Joe Biden currently holds the leading position in most national polls and has an edge in most key wavering states. Goldman analysts emphasized that carefully tracked indicators such as event prediction markets and publicly available models now increase the chances of a Democratic Net Victory, or so-called «blue waves» (Bleu wave) – victories in the White House, Senate and House of Representatives – with a score of over 60%.
Meanwhile, on vaccines, Pfizer expects «final results» the third phase of trials of the coronavirus vaccine by the end of October, while Moderna indicated that the first interim analysis of its third phase trials should be available in November.
«If vaccines are highly effective, these early results may be sufficient to suggest a high likelihood of emergency FDA approval by the end of the year.», – said in a note Zach Pandle (Zach Pandl), Co-Head of Global FX, Rates and EM Strategy.
«There are certainly important risks: we are most uncertain about the length of the vote count (especially in the Senate) and the stock market‘s reaction to «blue wave». But the big difference in current polls lowers the risk of delayed election results, and the prospect of short-term vaccine breakthroughs could provide support for risky assets.».
Another risk is a vaccine that is less effective than expected, although Pandle’s team calculated that this would likely only move the recovery timeline by about one quarter due to the large number of other vaccines in development..
As the downside risks emerged in the fourth quarter, Goldman recommended the following two strategies to lower the dollar. A short position in a currency, which involves selling it with the intention of redeeming it later at a lower price, betting on its depreciation, and opening long positions in other instruments.
As such, Pandle’s team recommended going long on a volume-weighted basket of Mexican pesos (MXN), South African rand (ZAR) and Indian rupees (INR), as well as a separate equal-weighted basket of Canadian dollars (CAD), Australian dollars (AUD) and euro (EUR). Weighted average price is an indicator of the average price of a financial instrument over a specified period of time.
«In our opinion, «blue Wave» US elections and favorable vaccination timing news could bring trade-weighted dollar and DXY index back to 2018 lows», – concluded Pandle.
The dollar index, which measures the dollar’s value against a basket of foreign currencies, is currently trading slightly below 93.10 up from about 88.25 low in 2018.