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2 Apr 2015
DXY likely to test/break 95 in 4-6 weeks – BAML
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, remain of the view that Q2 might bring some downside surprises to the USD strength, and further note that Volatility remains the ‘but the dip’ trade of 2015.
Key Quotes
“Some reversal in the US dollar would not be a surprise. The Feb "blinked" in March because of the risks associated with a disorderly dollar surge.”
“DXY likely to test/break 95 in next 4-6 weeks; this suggests bear market rallies in commodities, resources, EM et al. This already hinted at by recent favourable reversal in world's most contrarian pair trade: long PBR, short HD. Tactics aside we remain structurally bullish the US dollar.”
“We remain a buyer of volatility (so at margin add to gold and cash). Without doubt the key Q2 call is can the US economy recovery its mojo (i.e. Q2 GDP pops >3%) or not (GDP for 3rd consecutive quarter fails to break much above <2%).”
“Big GDP...Fed hikes get priced-in. Small GDP ..."secular stagnation" back in play, investor "buyers strike" in overvalued corporate bonds and equities.”
“In either scenario, volatility performs well. Vol remains the "buy the dip" trade of 2015.”
“Lower exposure to spread product. BAML house view is US GDP >3.5% Q2. This likely to put upward pressure on bond yields as June/Sept in play for hike. In turn this is likely to widen spreads across corporate bonds, a trend that at any moment can be exacerbated by latent investor fears on market liquidity, speculative excesses in "yield" products, and levered ETF risk parity strategies.”
Key Quotes
“Some reversal in the US dollar would not be a surprise. The Feb "blinked" in March because of the risks associated with a disorderly dollar surge.”
“DXY likely to test/break 95 in next 4-6 weeks; this suggests bear market rallies in commodities, resources, EM et al. This already hinted at by recent favourable reversal in world's most contrarian pair trade: long PBR, short HD. Tactics aside we remain structurally bullish the US dollar.”
“We remain a buyer of volatility (so at margin add to gold and cash). Without doubt the key Q2 call is can the US economy recovery its mojo (i.e. Q2 GDP pops >3%) or not (GDP for 3rd consecutive quarter fails to break much above <2%).”
“Big GDP...Fed hikes get priced-in. Small GDP ..."secular stagnation" back in play, investor "buyers strike" in overvalued corporate bonds and equities.”
“In either scenario, volatility performs well. Vol remains the "buy the dip" trade of 2015.”
“Lower exposure to spread product. BAML house view is US GDP >3.5% Q2. This likely to put upward pressure on bond yields as June/Sept in play for hike. In turn this is likely to widen spreads across corporate bonds, a trend that at any moment can be exacerbated by latent investor fears on market liquidity, speculative excesses in "yield" products, and levered ETF risk parity strategies.”