Bull sh on the dollar

Athanas os Vamvak d s, strateg st, BofA ML

Dünya Executive - - REPORT -

The dollar has been the worst perform ng G10 currency s nce end-November, along w th the Japanese yen. The New Zealand and Austral an dollars are perform ng the best wh le the euro s somewhere n the m ddle. This s desp te approval of US tax reform, another Fed h ke n December and the rates market mov ng toward pr c ng sl ghtly more than two hikes n 2018, the US hav ng the strongest data surpr ses n the G10, and the market already be ng short on the dollar. Everyth ng seems to be po nt ng toward a stronger dollar, but the dollar s gett ng weaker. But Euro/dollar has overshot the data and rate d fferent als. Eurozone data has been strong, but US data has been even stronger. The market s long EUR, wh le a year ago t was long USD. We expect further Fed and ECB monetary pol cy d vergence, wh ch the market has yet to pr ce for the Fed. We see r sks for four Fed h kes n 2018, follow ng approval of the tax reform, wh ch we expect to support the dollar through f scal st mulus and prof t repatr at on, wh le market expectat ons rema n too pess m st c. Fiscal st mulus at a t me that the US economy s already at full employment could lead to nflat on surpr ses. The Ital an elect ons n March could also pose negative euro r sks. We are more construct ve on the euro later n the year, as the European Central Bank ends quant tat ve eas ng. (January 11)

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