Bank of America / Merrill Lynch are looking away from US-policy impacted trades

The bank says:

  • Given high uncertainty on US policies and very low FX volatility, we prefer relative value trades or trades that are not affected much by the US, before we get more clarity this fall.

They recommended:

  • ... two relative value trades, long NZD/JPY and short CHF/NOK.
  • We also recommend buying EUR/GBP, to position for difficult Brexit negotiations ahead.

Long NZD/JPY ... The market is short NZD/JPY

  • According to our estimates, short NZD is the most stretched short position in G10 FX.
  • Although not stretched, the market is long JPY.
  • Therefore, the short NZD/JPY market position could be at risk for a squeeze higher. Our data analysis flags upside risks for NZD/JPY.
  • A heatmap ranking G10 FX based on data and fundamentals flags upside for NZD and downside for JPY, with the two at the two extremes
  • We have recently argued that domestic flow dynamics is becoming more supportive for USD/JPY and cross-yen pairs.
  • We believe that the RBNZ's stance is not sustainable. The RBNZ has doggedly maintained its dovish stance in its latest MPS, despite very strong data and weaker trade weighted exchange rate. Stable and low core inflation at 1.5% has allowed them to do so, but should this begin to rise later this year, the RBNZ should be comfortable shifting to a tightening bias and tolerating some NZD appreciation.

(bolding mine ... and BTW, I'll post another of their 2 trade ideas ASAP)