Bank of America (BofA) suggests a bullish stance on the USD, emphasizing the significant influence of potential stimulus measures from China. While sentiment around China's reflation is nearly at its 2022 lows, BofA's analysis shows a notable lag in USD's performance in relation to deteriorating sentiment in China, particularly in G5 currencies. Among these, CHF, GBP, and EUR present the most favorable risk-reward balance for USD longs should China's sentiment continue to falter.

Key Insights:

• Bullish on USD: BofA remains optimistic about the USD but emphasizes the pivotal role of China's potential stimulus measures in the coming weeks.

• China Reflation Sentiment: Confidence around China's reflation is nearing its lowest point from 2022. This sentiment has been a dominant factor impacting USD performance since February 2023, surpassing even the influence of Federal Reserve policies.

• USD Lags Behind: Despite the deteriorating sentiment in China, the USD has not mirrored this decline to the same degree, especially within the G5 currencies. This divergence is most pronounced in the CHF, GBP, and EUR.

• Potential Opportunities: Given the current scenario, BofA suggests that the CHF, GBP, and EUR could provide better risk-reward opportunities for USD long positions, especially if the sentiment around China remains subdued.

Implications:

For investors and traders, the ongoing developments in China, especially any potential coordinated stimulus measures, will be critical to monitor. Should China's sentiment continue to decline without significant intervention, opportunities may arise for USD long positions against specific G5 currencies, particularly CHF, GBP, and EUR.

Conclusion:

While the global financial community watches China closely, BofA's analysis underscores the significant influence of China's economic sentiment on the performance of the USD. Investors may find better risk-reward opportunities in the USD against the CHF, GBP, and EUR, particularly if China's economic outlook remains bleak.