Bank of America Global Research flags rates, ToTs and war as key G10 FX drivers, and discusses how they could affect FX in the rest of the year and what could surprise.
"G10 FX has had a very interesting year so far. Commodity currencies have done the best and JPY the worst in G10, while USD has done the best in G4. FX vol has increased. We see three main drivers: central bank policy normalization, terms-of-trade (ToT) shocks and the war in Ukraine. Risk sentiment and economic data have not mattered by much," BofA notes.
"Looking ahead, the war in Ukraine and persistent ToT shocks remain known-unknowns. As long as the war continues, we maintain our bearish and out-of-consensus bearish EURUSD view, and we remain positive on commodity currencies. We believe markets are pricing too much tightening for the Riksbank and the SNB, and we are bullish NOKSEK and bearish CHFJPY. We also remain concerned about an equity market correction that could lead to even higher FX vol,"BofA adds.