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Goldman: Bet on rate normalisation (but not from the countries you think)

Coming into 2017, the spectre of policy normalisation in the US dominated currencies strategies at many investment houses, but it didn’t turn out so well. Now, Goldman Sachs says investors should worry less about that idea, and focus more on finding countries whose central banks may be emboldened by an improving global economy.

Goldman on Wednesday issued a new strategy called “Go Long the ‘Time to Normalise’ Markets.” In Europe, the investment bank suggests placing bets that the Swedish krona and Norwegian krone will rise against the euro and British pound.

“The cyclical picture in Sweden and Norway differs slightly, but we think both the Riksbank and Norges Bank will begin normalisation sooner than markets anticipate,” Zach Pandl, a Goldman foreign exchange strategist, said.

In the case of Sweden, Mr Pandl notes that inflation has moved above the Riksbank’s target, while expectations for price growth have “rebounded” after sliding between 2012 – 2015. “A policy rate of minus 0.5 per cent no longer seems appropriate for this economy,” he said.

Meanwhile, in Norway, “growth is now booming” despite some issues with spare capacity. “Norges Bank could therefore consider reversing its most recent rate cut, from March 2016, at some point next year,” he said.

On the other side of the equation, Mr Pandl reckons the European Central Bank will hold policy rate expectations steady even as it eases its bond-buying programme. The Bank of England “will continue to look through above-target inflation due to political uncertainty and long-term risks posed by the Brexit process,” he said.

In Asia, Goldman suggests taking a bullish stance on the Australian and New Zealand dollar over the Japanese yen. Mr Pandl pointed to similar dynamics in that part of the world as he expects to play out in Europe:

…while the specifics may differ, we expect both central banks to move policy rates up sooner than markets currently anticipate … and both exchange rates to receive a tailwind from favourable global growth.

At the same time, monetary policy in Japan looks very unlikely to change for the time being, and yield curve control should amplify the effects of higher global rates on the yen.

Looking at North America, Mr Pandl has trained his eyes on Canada. He recommends shorting the US dollar over its Canadian counterpart. The Bank of Canada may have even more surprises in hand for investors after it began its normalisation process last month, he said.

“We think markets may still be underestimating the potential for multiple hikes over the next year,” Mr Pandl added, pointing to “very solid” output growth in Canada.