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What will drive the market in the fourth quarter
Bank of America Global Research discusses the USD drivers in 4Q.
“China has been an important driver of the US dollar in
recent months but we expect a transition to more US-specific drivers in
4Q, reasserting its positive correlation with US yields. Much
depends upon the impact of Fed tapering on US real rates – while the
taper signal itself has had limited impact, both the level and
volatility of real rates are likely to be affected when the Fed’s
footprint in the TIPS market diminishes,” BofA notes.
“We draw three conclusions for FX markets: 1) based on historical betas, our expected real rate repricing could contribute ~1-2% of further DXY upside – modest but statistically significant; 2)
higher real rate volatility should be associated with higher USD pair
volatility once taper begins – USDCHF vol looks attractive relative to
its term structure; 3) a persistent negative real rate
regime over the longer term would reduce the vulnerability of “risky” FX
to higher real rates,” BofA adds.
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