Asia FX moves little with focus on US-China trade, dollar steadies ahead of CPI
Investing.com -- Bank of America Global Research recommends fading the elevated risk premium in foreign exchange markets caused by recent geopolitical shocks and the euro breaking the 1.15 resistance level against the U.S. dollar following soft U.S. inflation data.
The bank notes that despite recent market volatility, a macro shock regime was not triggered in its CARS model, suggesting the current risk premium may be overdone. For the current week, BofA’s systematic signals indicate a preference for fading rallies in currencies with strong one-year correlations to commodity prices.
Specifically, the Australian dollar and Norwegian krone in the G10 currency group are identified as candidates for this strategy. BofA suggests expressing these views through currency crosses rather than direct U.S. dollar pairs.
The research note points out that the U.S. dollar did not experience significant appreciation following the geopolitical shock, and any weakness stemming from soft U.S. inflation data has largely been priced into markets already.
For the current week, BofA expects new catalysts will likely drive dollar movement, particularly the Federal Reserve’s dot plot guidance from the FOMC meeting and potential trade deal announcements from the G7 meeting.
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