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Mar 21 - 09:55 AM

BofA: Evaluating G10 FX Exposure to Potential Equity Market Downturn

By eFXdata  —  Mar 21 - 09:27 AM

Synopsis:

BofA examines the vulnerability of G10 currencies to an equity market correction, considering the context of global equities achieving new peaks amidst central bank deliberations on rate cuts. The study suggests that despite the rally in risk assets driven by better-than-expected growth and declining inflation during the monetary tightening phase, the persistence of inflation and private credit data hint at an impending economic downturn.

Key Points:

  • Equity Market and Economic Growth Correlation: BofA's analysis involves adjusting stock market performance by nominal GDP growth post-pandemic, aiming to align equity market trends with economic performance and future expectations.
  • Vulnerability Assessment: The currencies identified as most susceptible to a potential equity market correction, in the context of an economic slowdown, are the Japanese Yen (JPY), US Dollar (USD), Norwegian Krone (NOK), and Swedish Krona (SEK).
  • Risk Asset Performance: The strong performance of risk assets, attributed to declining inflation and unexpected economic resilience, faces potential risks from stickier inflation and signs of an approaching economic downturn.

Conclusion:

BofA's analysis highlights the differential exposure of G10 currencies to potential equity market corrections in the face of an economic downturn. By correlating stock market performance with nominal GDP growth, the study pinpoints JPY, USD, NOK, and SEK as currencies particularly at risk. This assessment underscores the complex interplay between equity markets, economic performance, and currency vulnerability, emphasizing the importance for investors to consider these dynamics in their strategies.

Source:
BofA Global Research

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