Bank of America Merrill Lynch FX Strategy Research advises USD bulls to be patient in light of the following 5 reasons:
“1- It could take few more months for the market to move toward the Dot Plot. The June hike is not a given, in our view, and to a large extent will depend on the data before the actual meeting, including in particular the next NFP and wage earnings.
2- It could also take few more months to know whether the US will reform its tax system and how. The USD roller-coaster since the US elections, to a large extent, has to do with market expectations about the chances of tax reform.
3- We would expect ECB QE tapering to be a more important theme during this summer, ahead of the September meeting. Although our economists expect a very slow pace-reducing the monthly purchases to 40bn euro and stretching QE until the end of 2018-it will be hard for the USD to rally against the EUR before we get these details.
4- Similarly, the BoJ will need to do more pushback against market expectations for early exit from their yield-targeting framework to persuade the consensus that the central bank will stick to it until inflation reaches its target, from currently negative core inflation.
5- The market remains bullish EM. Although we have been flagging risks from stretched long positions in EM, our EM flows remain strong and investors buy EM dips when they get them,” BofAML argues.
As such, BofAML advises USD bulls to be selective and sell JPY, expecting diverging monetary policies, and GBP ahead of difficult Brexit negotiations.
Source: Bank of America Merrill Lynch Rates and Currencies Research
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