In the current market conditions, what emphasis should be given to valuation in hedging decisions?
Here is their view, courtesy of eFXdata:
Bank of America Global Research discusses the FX market conditions and continues place little emphasis on valuation as an anchor for hedging decisions for now.
“As an asset class, FX has been largely ignored by investors in recent years. As a result of the compression of both spreads and FX volatility, investor decisions on their FX hedging have often been passive and secondary to underlying asset decisions,” BofA notes.
“We argued that investors needed to be more dynamic in their hedging decisions and the steep change in both volatility and skew provides a striking warning that hedging decisions cannot be left to chance. The ‘post-COVID’ normal will likely lead to renewed hedging demand, not because of any overwhelming evidence from our signals, but because the sheer ferocity of the moves particularly in the FX options market will almost force these decisions upon investors via its impact on volatility and market liquidity. One conclusion from our previous analysis remains: we continue to place little emphasis on valuation as an anchor for hedging decisions for now,” BofA adds.
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