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Oct 16 - 01:24 PM
G10: FX Opportunities In Risk-On/Risk-Off (RO/RO) Conditions - BofAML
First appeared on eFXplus on Oct 16 - 11:35 AM

Bank of America Merrill Lynch Global Research discusses the key takes on its latest work to incorporate recent sensitivities to assess potential FX moves in risk-on and risk-off conditions.

"Trade policy uncertainty remains a persistent source of global financial market gyration. Ups and downs in US-China and Brexit negotiations have buffeted FX markets and caused loss of conviction among investors. Of late, markets have rallied sharply on prospects for a reduction in global policy uncertainty. While the rally may continue, it could also reverse quickly. That is just the reality investors face these days," BofAML notes.

"Overall, we find USD/JPY is most sensitive to RO/RO conditions, but this is driven more by the interest-rate differential effect than specific risk appetite and ToT effectsIn risk-on, the pair is a preferred long as positive carry also works in the investor's favor. But in risk-off, negative carry can be punitive over longer holding periods," BofAML adds.

"Overall RO/RO sensitivities of USD/NOK and AUD/USD are about half that of USD/JPY despite their direct risk appetite-related effects being larger. But long USD/NOK and short AUD/USD offer staying power in risk-off as they are positive carry. This may explain why these pairs have trended so strongly this year amid a persistently uncertain policy backdrop," BofAML concludes.

 

Source:
BofA Merrill Lynch Research/Market Commentary

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