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Jun 09 - 09:55 AM

USD: Does Policy Convergence/Divergence Matter For FX - BofA

By eFXdata  —  Jun 09 - 09:25 AM

Bank of America Global Research discusses the impact of monetary policy divergence/convergence on the FX market.

"FX markets have fixated on the policy divergence/convergence theme for some time, especially in the context of USD strength being driven by Fed policy tightening. There are signs, however, that front end rate differentials are becoming less relevant for USD pairseven as other factors such as oil, risk and China dominate," BofA notes. 

"We think the transition from policy divergence to policy convergence is unlikely to be sufficient for sustained USD weakness in our view. We update our principal component analysis (PCA) approach to identify external drivers of G10 FX, showing that USD strength has been largely consistent with what our estimates would imply. That said, both rate differentials and our PCA-based assessment suggest the Canadian dollar may have overshot vs. USD near term," BofA adds. 

Source:
BofA Global Research

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