Over a week after the Fed decided not to hike, the echoes are still heard, and reiterated by Yellen.
Yet it is not only the Fed. Here are 3 reasons for going long USD by Bank of America Merrill Lynch:
Here is their view, courtesy of eFXnews:
Markets continue to digest the Fed’s “dovish hold” last week, and the FX market is no different, notes Bank of America Merrill Lynch.
“Knee-jerk USD weakness was understandable given the dovish elements of the statement, which exceeded even dovish expectations. But, the dollar has since reversed its losses and remains higher than pre-FOMC levels. With the near-term rate outlook significantly less certain now, and complications due to the ongoing China-induced volatility, investors may be hesitant to re-engage USD longs at the current juncture,” BofA adds.
While acknowledging that near-term caution is warranted, BofA believes three factors suggest tactical USD longs could make sense:
1. USD longs are significantly less stretched than they have been over the past one or two years. “Despite the dovish response to the Fed’s no-hike last week, some context on positioning is important, and could shed light on the USD’s outlook. Since the USD rally began in mid-2014, stretched positioning has been a common refrain for those looking to avoid re-loading USD longs. USD long positioning is now at its lowest level since the dollar rally began,” BofA clarifies.
2. Don’t miss the forest for the trees. “Despite the Fed’s dovish tone, US fundamentals remain strong and will likely trump short-term distractions from China. This ultimately supports rate hikes in December, as our US Economics team believes ,” BofA argues.
3. Markets thus far seem to under-appreciate the risk of other central banks taking action.“The USD’s resilience since the Fed, in part reflects the expectation that other central banks like the ECB will have to ease policy further with the Fed having taken a pass…In a similar vein, the significant nominal effective appreciation of the Yen (close to the level when QQE was expanded in October 2014), could pressure the Bank of Japan (BOJ) towards further action as well,” BofA adds.
“Combined with reduced USD long positioning, a strong response from global central banks could provide an impetus for the next leg higher in the USD,” BofA concludes.
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