Synopsis:

Bank of America’s 60/40 portfolio rebalancing model suggests moderate month-end flows into USD and GBP, with outflows from EUR and EM. While they recently closed their long EUR/USD trade due to rising geopolitical risks, they believe any EUR/USD dip will be faded by USD bears, especially if US labor data weakens.

Key Points:

• Rebalancing Flow Estimates:
  • USD & GBP Inflows: ~+0.7σ each
  • EUR Outflows: ~–0.9σ
  • EM Outflows: ~–0.8σ

• Trade Implications:
  • BofA has closed long EUR/USD positions due to geopolitical and technical factors.
  • Despite this, EUR/USD downside may be limited, as markets increasingly expect a soft US payrolls print and USD bears may fade any dip.

• Contextual View:
  • USD & GBP asset underperformance in June supports rebalancing flows.
  • Yet EUR/USD resilience to recent geopolitical risk has surprised, reinforcing long-term bullish interest.

Conclusion:

BofA expects USD and GBP to benefit from month-end rebalancing flows, but sees any EUR/USD weakness as an opportunity for re-entry, particularly if US labor data disappoints.