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From oil to currencies to interest rate swaps, one of the world’s top investment banks is betting on inflation to be the biggest generator of market returns in 2022.

In its widely anticipated top trading ideas for next year, Goldman Sachs recommends buying currencies of countries where policy-makers will take a more hawkish approach to inflation as economies struggle to tame price pressures.

“Given the recent volatility of inflation, the elevated spot readings, and the upside skew – all of which we expect to persist well into next year – we believe markets will begin to demand positive inflation risk premia,” the U.S. bank’s analysts told clients in a note.

A key market-based long-term gauge for inflation expectations is among its top trading ideas. The bank recommends buying the U.S. five-year, five-year forward break-even inflation rate, which surged to its highest in seven years last month.

While policy-makers have pushed back in recent weeks against market bets that inflation pressures are becoming more entrenched and that higher interest rates will be needed to quell them, economic data has been signalling otherwise.

Data on Wednesday showed U.S. consumer prices surged to their highest since 1990 in October.

“To the extent the Fed is reluctant to signal a more aggressive stance, we would expect prices to incorporate higher inflation risk compensation,” Goldman Sachs said.

Amid rising commodity prices and a “bullish oil view,” Goldman analysts favoured the oil-sensitive Canadian dollar over the Australian dollar, which is more exposed to China’s economy.

“AUD is also more exposed to metals prices and, relatedly, downside risks to China growth, which we expect to remain a key theme across markets as we enter 2022,” they said.

Among other currencies, their top picks are the Swedish crown, Czech crown and Polish zloty, which they expect to fare better than the euro. All three tend to be strongly correlated with the cyclical outlook, “so should benefit from the European growth outperformance that we anticipate,” Goldman Sachs said.

In equities, the investment bank recommends purchasing Mexican and Russian stocks as they are a strong “defensive” play against the usual emerging market headwinds of higher U.S. rates and slowing Chinese growth.

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