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:
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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.
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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.
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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.
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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