USD: 'Against Consensus': What's The Trade For USD Bulls? – BofAML

Bank of America Merrill Lynch FX Strategy Research is not in line with the market’s consensus on the expectations for the Fed hikes and the US tax reforms this year.

The market is pricing a very slow Fed. We expect at least two more hikes this year and three next year. Indeed, this week’s FOMC confirmed that the Fed will hike in June if the recent weakness in data proves to be temporary-Q1 seasonality and bad weather in March,” BofAML argues.

The consensus is too pessimistic on the chances of US tax reform. The market is pricing an almost zero chance. The risks are for a positive surprise. Tax reform before the summer recess is unlikely, but we believe it is very likely before the end of the year. Optimistic growth projections suggest that the tax reform will actually support the US economy with fiscal stimulus, which is positive for markets, at least in the short term,” BofAML adds.

Strategy: BofAML recommends that USD bulls may want to consider shorting AUD/USD.

This trade would work, if the Fed hikes faster than markets expect, if the US approves tax reform, if we get a risk-off market move, if China problems come back, or if markets get more concerned about geopolitical risks in North Korea,” BofAML argues. 

AUD/USD is trading circa 0.7415 as of writing. 

Source: Bank of America Merrill Lynch Rates and Currencies Research

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