Goldman Sachs (GS) is forecasting euro parity against the greenback next year in its top ideas for 2017, with dollar strength relative to the euro and sterling taking the top spot as its number one trade.
Others include bullish calls targeting emerging markets and inflation-protected fixed income. For the full list, see below;
Top Trade #1:
Divergence between economic fortunes on either side of the Atlantic ocean are likely to mean further gains for the U.S dollar relative to the euro and the pound.
Goldman sees the euro at parity against the dollar by the end of the fourth-quarter 2017. This is while sterling is set to trade between the bank's forecast of 1.2000 at the start of the year and 1.1400 by the end of the final quarter.
In addition to trading gains, investors could earn an interest rate carry of 1.3%, according to the presentation.
Top Trade #2
Capital outflows stemming from fears of a trade-fight with Donald Trump added to an already strong U.S. dollar, leave Goldman analysts anticipating a further decline of the Chinese currency relative to the dollar.
They forecast that the dollar-renminbi pair will rise from 6.87 at the end of 2016 to 7.30 by the close of 2017. However, Goldman's preferred means of trading the pair is via the 12-month non-deliverable-forward.
Top Trade #3
Dollar strength remains a base ingredient of the Goldman Sachs menu for the year ahead but higher interest rates and a bullish outlook for emerging market economies has left analysts eyeing an EM carry-trade.
Goldman recommends going-long on an equally weighted basket of Brazilian reals, Russian roubles, Indian rupees and South African rand, at the same time as getting short an equally-weighted basket of Korean won and Singapore dollars.
The bank's analysts forecast a return of 14% from the trade.
Top Trade #4
Adopting the view that recent volatility in the wake of Donald Trump's election victory will be temporary and that trade concerns are likely overdone, Goldman's bullishness on emerging markets isn't just limited to interest rates and economies.
Emerging market equities are in at number four, with Brazilian, Indian and Polish stocks all likely to earn a decent return.
The analysts estimate that a long position on the BOVESPA, NIFTY and WIG will earn investors 7% from the interest rate carry and a further 7% of price returns, making a total of 14% for the year.
Top Trade #5
Reflation in developed markets is set to become a central consideration of all investment policies in 2017 after the effect of commodity price weakness of recent years begins to wane and, in some cases, currencies weaken.
In this environment, Goldman advocates buying into inflation-protected fixed income, which guarantee a coupon that is fixed above the rate of inflation.
The team favors going long 10-year US TIPS, entering with break-even inflation at 1.9% and targeting a rise to 2.3%.
Top Trade #6
European dividends are also a hot favorite, that could offer as much as a 12% return, for the year ahead. The bank advocates buying the EURO STOXX 50 2018 Dividends Index for what it calls an 'equity-like carry', with a target of 125.0.