Goldman Sachs drops the euro from its list of currencies expected to surge against the dollar

(CNBC) – Goldman Sachs has dropped the euro from its list of major currencies backed to outperform against the dollar in the aftermath of the U.S. election.

The Wall Street giant recommended a series of short positions for the dollar against G-10 currencies in early October, warning that the risks arising from vaccine trials and the U.S. election are skewed to the downside for the greenback.

However, France and Germany both announced fresh lockdown measures last week and the European Central Bank (ECB) strongly hinted that it will ease monetary policy further in December, complicating the outlook for the common currency.

“On the one hand, a ‘blue wave’ scenario in the U.S. election and vaccine confirmation (expected in November) would likely boost all cyclical assets, including the euro,” Goldman Sachs Co-Head of Global FX, Rates and EM Strategy Zach Pandl said in a note Monday.

“On the other hand, near-term euro area GDP (gross domestic product) growth could badly underperform other regions, and we would expect markets to partly price in a deposit rate cut, even if the Governing Council ultimately ‘recalibrates’ other instruments.”

Goldman has therefore removed the euro from the basket of G-10 currencies it backs to outperform against the dollar, leaving in place long positions in the Canadian and Aussie dollars. Short trades in currencies involve borrowing a currency and selling it at the current market rate, with a view to buying it back at a lower price, in essence betting that the currency will depreciate.