BofA examines the performance of European majors and high-beta currencies in the G10 FX segment, noting significant gains in the former group in comparison to the latter. The report highlights significant rallies for EUR/AUD, CHF/JPY, and GBP/SEK throughout 2023 and discusses potential factors that could drive reversals in these currency pairs.
Key Crosses Performance:
EUR/AUD: This cross has witnessed a rally of about 7% year-to-date.
CHF/JPY: CHF/JPY has soared, seeing an increase of about 18% from the beginning of the year.
GBP/SEK: Up by approximately 10% since the start of the year.
Catalysts & Risks:
- Drivers of Rally: Possibly due to a relative economic performance, monetary policy divergence, or geopolitical tensions affecting the AUD more than the EUR.
- Reversal Catalysts: Potential shifts in risk sentiment, a resurgence in commodities that boosts AUD, or a positive shift in the economic outlook for Australia could trigger a retracement.
- Drivers of Rally: The safe-haven status of the CHF amidst global uncertainties, juxtaposed with economic and fiscal challenges in Japan, might have contributed to this rally.
- Reversal Catalysts: An uptick in global risk sentiment or substantial economic recovery in Japan could weaken the CHF's appeal against the JPY, but BofA believes these forces might only manifest in 2024.
- Drivers of Rally: Economic resurgence post-Brexit, coupled with challenges in the Swedish economy or shifts in respective monetary policies, could be behind the rally.
- Reversal Catalysts: An improved outlook for Sweden, potential Brexit-related setbacks, or shifts in monetary policy sentiment could drive retracements in Q4 2023.
While European majors like EUR, GBP, and CHF have shown strong performance against high-beta currencies and the JPY, BofA suggests potential retracements in the near future. Specifically, they forecast reversals for EUR/AUD and GBP/SEK in the final quarter of 2023, while anticipating that a shift in the CHF/JPY dynamic might only become evident in 2024. Traders and investors should consider these insights while navigating the currency markets.