BofA revises USD forecast, predicts further weakness to benefit EEMEA

Bank of America forecasts continued USD weakness, projecting EUR/USD at 1.2 by end-2025 and 1.25 by end-2026, primarily due to rising stagflationary risks. This outlook underpins a structurally bullish stance on EEMEA currencies, specifically recommending ZAR, CZK, PLN, and KZT, and supports EEMEA equities. Within regional equity rankings, Egypt and Greece maintain leading positions, South Africa and UAE have improved, while Hungary has slipped. Financials remain the dominant sector in BofA's top stock screen, featuring Turk Telecom, PKO BP, and Absa, as the EEMEA region continues to see net inflows despite recent market headwinds.

Analysis

Bank of America has issued a bearish forecast for the U.S. dollar, projecting the EUR/USD exchange rate to reach 1.20 by the end of 2025 and 1.25 by the close of 2026, driven by what it identifies as rising stagflationary risks. This macro view underpins a structurally bullish stance on currencies in the Eastern Europe, Middle East, and Africa (EEMEA) region, with specific long recommendations for the South African Rand (ZAR), Czech Koruna (CZK), Polish Zloty (PLN), and Kazakhstani Tenge (KZT). In its regional equity market rankings, BofA places Egypt and Greece at the top, while noting South Africa's return to the top three on the basis of improving investor positioning and the UAE's ascent on a stronger earnings outlook. Conversely, Hungary has slipped from its top ranking due to slowing earnings and dividend growth. At the stock level, the bank's top-20 screen is dominated by the financials sector, which accounts for nine names, with Turk Telecom, PKO BP, and Absa ranked as the top three picks. Despite a recent USD rebound and seasonal slowdowns, market flow data for August indicates continued net equity inflows into the EEMEA region, though flows are divergent, with Central and Eastern Europe seeing renewed interest while Turkey and most GCC countries (excluding Saudi Arabia) experienced moderate outflows.

Key Decisions for Investors

• Consider positioning for sustained U.S. dollar weakness by evaluating long positions in recommended EEMEA currencies such as ZAR, CZK, PLN, and KZT.
• Investors with an emerging markets allocation should review their EEMEA exposure, potentially overweighting markets with positive momentum and fundamentals like Egypt, Greece, South Africa, and the UAE, while remaining cautious on markets showing signs of slowing growth, such as Hungary.
• Focus on the financials sector within EEMEA, as it is heavily favored in BofA's screening, and conduct due diligence on top-ranked companies like Turk Telecom, PKO BP, and Absa.
• Monitor regional fund flow data closely as a sentiment indicator, paying attention to the divergence between inflows into Central and Eastern Europe and outflows from Turkey and the GCC to gauge conviction and market rotation.