Fundamentals don't matter as much as they used to
Bank of America Global Research discusses the current FX market conditions and highlights the increasing importance of cross boarder flows.
"As the FX market becomes increasingly driven by the cross-border flow of funds channel rather than fundamentals(the 12-monthrolling correlation between global datasurprises and the USD index is still close to zero), we think investors need to be more dynamic in their hedging decisions," BofA notes.
"Flows such as US reverse Yankee issuance and Japanese investors selling European assets in favor of UShave been a strong focus for investors in recent months as they try to better understand FX price action against the backdrop of exchange-rate misalignment. With central banks showing little intent to move policy back to a normal footing, the flow of funds channel will likely continue to dominate, in turn lessening the focus on valuation misalignments," BofA adds.
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