Bank of America (BofA) reviews foreign exchange (FX) market flows at the beginning of 2024, highlighting a partial reversal of the trends seen at the end of 2023. Initially, investors moved away from the USD, favoring EM (emerging markets) currencies, driven by a more dovish stance from the December FOMC meeting and an optimistic US inflation outlook. However, the robust US economic data at the start of 2024 prompted investors to reevaluate, leading to increased demand for USD, as indicated by BofA’s proprietary FX flows and activities in the FX options market.
Shift in FX Flows: The start of 2024 saw a recalibration of FX investments, with a notable pivot back towards the USD, spurred by enduring US economic strength.
FX Options Activity: There's been a noticeable uptick in demand for USD calls in the FX options market, aligning with the shift in direct FX flows.
Drivers of Price Action: Hedge Funds, particularly those based in Asia, appear to be major influencers of current FX price movements, suggesting a speculative rather than fundamental shift.
Investor Participation: For sustained USD strength, increased participation from Real Money investors is deemed necessary, though Hedge Fund activity could signal potential for a USD pullback.
Positioning Risks: BofA observes that FX positioning is relatively light, reducing the risk associated with their trade recommendations based on recent shifts in investor positioning.
BofA's analysis underscores a dynamic start to 2024 in the FX markets, with early actions reflecting a cautious reassessment of the USD's position. The bank points to Hedge Fund-driven price actions as a critical factor in the near-term direction of the USD, indicating that while the resurgence of the USD has been noted, a broader consensus among Real Money investors is needed for more definitive trends. Investor positioning remains fluid, suggesting that the FX market may continue to experience shifts in sentiment and positioning as new economic data and policy developments emerge.