A Tactical USD Rally Ahead In Either A Risk-On/Risk-Off Scenario - BofA Merrill

A Tactical USD Rally Ahead In Either A Risk-On/Risk-Off Scenario - BofA Merrill

14 April 2016, 23:03
Vasilii Apostolidi
0
30

Since the Fed divergence story began, the USD has become positively correlated to risk. However, we think the USD could start behaving like a ‘safe haven’ again due to the recent dovish turn in FOMC rhetoric. The key observation is that when Fed hike expectations are pushed out past one year, the USD tends to become negatively correlated with risk .

With the market pricing the next hike for more than a year from now, we think a selloff in risk assets could be dollar positive.

 

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On the other hand, if financial and economic variables continue to improve under a risk-on scenario, the Fed would have fewer reasons to delay rate normalization.

Therefore, we see a decent chance of a tactical dollar rally since it could occur in either a risk-on or risk-off scenario.

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