Synopsis:

BofA's quant models suggest a contrarian bullish stance on the USD as the market anticipates the upcoming FOMC meeting. Despite increased calls for a 50 basis point cut, the bank believes the Fed is more likely to implement a 25 basis point cut.

Key Points:

1. Market Expectations:

   • The market initially leaned towards a 25bp rate cut, but now reflects a 70% chance of a 50bp cut following an upward surprise in core CPI.

2. Option Flows:

   • FX option flows indicate a shift towards USD puts, suggesting bearish sentiment towards the USD.

3. Tactical Positioning:

   • BofA recommends a contrarian bullish USD view, anticipating a potential short-term rally if the Fed opts for a 25bp cut instead of the expected 50bp.

4. USD/CNH and SEK:

   • The bank sees potential for the USD to rebound against CNH, citing weak Chinese consumption and investment data as supportive factors.
   • It also anticipates weakness in SEK if the Fed cuts by 25bp, noting that both European and US investors are net long SEK.

5. Risks to the Outlook:

   • A risk to this bullish view would be weak retail sales data that could solidify expectations for a 50bp Fed rate cut.

Conclusion:

BofA remains tactically bullish on the USD leading into the FOMC meeting, expecting a potential rally based on a 25bp cut and market adjustments. Their analysis highlights specific currency pairs, particularly USD/CNH and SEK, as key areas for potential movement.