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Jan 14 - 09:55 AM

BofA: Bearish EUR View Near-Term; EUR/JPY and EUR/CAD Shorts Preferred

By eFXdata  —  Jan 14 - 09:19 AM

Synopsis:

BofA remains bearish on the euro near-term, citing trade uncertainty and relative monetary policy. They prefer expressing this view through short EUR/JPY and short EUR/CAD positions.

Key Points:

  1. Drivers of Bearish EUR Sentiment:

    • Trade Uncertainty: Elevated concerns, particularly related to the US, are impacting risk sentiment and driving EUR underperformance.
    • Relative Monetary Policy: Solid US jobs data reinforces Fed resilience, while the ECB faces a more dovish outlook.
  2. EUR Underperformance Explained:

    • Trade uncertainty has significantly contributed to EUR's underperformance against USD and "high-beta G10" currencies.
    • However, BofA's tracker indicates that trade-related concerns have slightly retraced from November highs.
  3. Monetary Policy Divergence:

    • ECB pricing appears fair, but BofA's economists maintain a bearish bias relative to the Fed. This sentiment is heightened when accounting for risk-adjusted dynamics.
  4. Preferred Trades:

    • EUR/JPY Short: A reflection of Japan's potential monetary tightening and ECB's dovish stance.
    • EUR/CAD Short: A play on Canadian dollar resilience amid broader euro weakness.

Conclusion:

BofA advises caution on EUR across G10 FX in the near term, favoring short EUR/JPY and short EUR/CAD to capitalize on monetary policy divergence and lingering trade uncertainties.

Source:
BofA Global Research

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