Back
23 Feb 2015
Upward USD trend may be more volatile ahead, low vol market of 2014 is over – BAML
FXStreet (Barcelona) - FXStrategists at BofA-Merrill Lynch, explain how volatility will increase in FX space as ‘forward guidance’ steps up the FX trade game, and further share the outlook for currencies based on a G10 heatmap and the key determinants of the market – monetary policy, growth, inflation, equity market performance, rate differentials and fundamentals.
Key Quotes
“We expect that the year so far is a preview of what will follow. Our year-ahead had argued FX volatility would increase as data dependence replaces forward guidance in monetary policy, ECB and BoJ QE would not be enough to replace Fed QE as boosters of global risk appetite, and oil prices would be lower and more volatile.”
“In the global monetary union with the US we pointed out that loose Fed policy and forward guidance in G10 central banks had killed market volatility and FX correlations with data and fundamentals, and argued volatility and such correlations would come back as Fed QE ends, G10 monetary policies diverge and USD strengthens.”
“We believe these forces remain valid. We recently argued FX volatility has become the prime driver of global volatility, as central banks react differently to the common oil price shock and some are behaving as if they are in a currency war.”
“The latest FOMC minutes also suggest the Fed is unlikely to continue ignoring the drop in inflation expectations, suggesting the upward USD trend may be more volatile looking forward. The low vol market of 2014 is over.”
“Long SEK, USD, JPY and NOK”
“Short CHF and CAD”
“And neutral GBP, EUR, NZD and AUD”
“Buying USD/CAD and USD/CHF”
“Selling CHF/JPY”
“Selling CAD/SEK and CAD/NOK”
Key Quotes
“We expect that the year so far is a preview of what will follow. Our year-ahead had argued FX volatility would increase as data dependence replaces forward guidance in monetary policy, ECB and BoJ QE would not be enough to replace Fed QE as boosters of global risk appetite, and oil prices would be lower and more volatile.”
“In the global monetary union with the US we pointed out that loose Fed policy and forward guidance in G10 central banks had killed market volatility and FX correlations with data and fundamentals, and argued volatility and such correlations would come back as Fed QE ends, G10 monetary policies diverge and USD strengthens.”
“We believe these forces remain valid. We recently argued FX volatility has become the prime driver of global volatility, as central banks react differently to the common oil price shock and some are behaving as if they are in a currency war.”
“The latest FOMC minutes also suggest the Fed is unlikely to continue ignoring the drop in inflation expectations, suggesting the upward USD trend may be more volatile looking forward. The low vol market of 2014 is over.”
“Long SEK, USD, JPY and NOK”
“Short CHF and CAD”
“And neutral GBP, EUR, NZD and AUD”
“Buying USD/CAD and USD/CHF”
“Selling CHF/JPY”
“Selling CAD/SEK and CAD/NOK”