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May 29 - 09:55 AM

BofA: Caution Against Selling USD on Improved China Sentiment

By eFXdata  —  May 29 - 08:33 AM

Synopsis:

Bank of America (BofA) expresses caution regarding the selling of the USD based on improved sentiment towards China's economic policy stimulus. While recent Chinese policy actions have sparked optimism and contributed to USD weakness, BofA advises against hasty financial moves influenced by these developments.

Key Points:

  • Policy Stimulus in China: Recent measures discussed at the April Politburo meeting and subsequent signals of monetary and property easing have led to a more positive outlook for China, influencing global markets and contributing to USD depreciation.
  • Lag in Impact: The effect of China’s import demand on the global economy typically trails its domestic credit impulse by about three-quarters. Although there was initial enthusiasm for a recovery in imports, April’s credit data underperformed expectations, suggesting potential delays in the anticipated uplift.
  • Uncertainty in Property Sector: While there is a push from the central government to stabilize the property market, the focus is currently on destocking rather than new investments and construction, which are more significant drivers of commodity imports.

Conclusion:

Despite the positive signals from China, BofA recommends a cautious approach to selling USD. The impact of Chinese economic policies on global markets, particularly the USD, is likely to be delayed. Moreover, the effectiveness of these policies in stimulating significant new economic activity remains uncertain. Investors are advised to watch for more definitive signs of sustained recovery in China's credit and property sectors before making major currency moves.

Source:
BofA Global Research

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