Factoring In 3 Global Risk Themes; What’s The FX Trade? – BofA Merrill

The US dollar is struggling on the dovish hike and there is a “risk-off” sense in markets. What’s next?

Here is their view, courtesy of eFXnews:

Bank of America Merrill Lynch Research outlines 3 key global risk factors in G10 FX, and broader financial markets:

1) the US outlook centered around the twin risks of tighter monetary policy and looser fiscal policy; 2) the Euro–zone outlook in the face of political risk and potentially less ECB policy accommodation; and 3) China‘s cyclical upswing despite a tighter policy bias and property restrictions since 2016.

Against this backdrop, BofAML provides a framework to understand whether the appropriate risk premium has been priced in or not.

 BofAML’s analysis shows the JPY stands out as having outperformed relative to its factor betas, while NZD and CAD have underperformed.

“We argue that if recent factor trends were to reverse, this would likely be associated with stronger EURJPY and weaker AUD Vs. NZD & CAD,” BofAML argues.