Bank of America sees bearish USD trend forming after payroll revisions

Bank of America reports a re-emerging bearish trend for the US dollar, citing sharp negative revisions to US payrolls data and deteriorating macro variables. The bank's FX Trend factor and option metrics signal continued USD weakness against currencies like GBP, SEK, and ZAR, a sentiment reinforced by foreign exchange investors shorting the dollar ahead of the largely in-line CPI release. BoA's G10 dynamic factor model further identifies the Australian and New Zealand dollars as undervalued, the Swiss franc as overvalued, and highlights specific valuation discrepancies in emerging market currencies, suggesting a sustained bearish outlook for the dollar and potential FX opportunities.

Analysis

Bank of America's latest research signals a renewed bearish trend for the US dollar, underpinned by sharp negative revisions to US payrolls data and a marginal deterioration in macro variables. The bank’s proprietary FX Trend factor has officially turned bearish on the USD, with option metrics indicating a continuation of the downtrend against the British pound, Swedish krona, and South African rand. This sentiment was echoed by FX investors, who were positioned short on the dollar leading into the recent US Consumer Price Index report. As the CPI data came in largely aligned with consensus forecasts without providing a bullish surprise, Bank of America expects the dollar's weakness to persist. The bank's G10 dynamic factor model further supports this view, identifying the Australian and New Zealand dollars as undervalued and the Swiss franc as the most overvalued currency. In emerging markets, the model flags the Indian rupee, Chilean peso, Indonesian rupiah, and Korean won as undervalued, while the Taiwan dollar, Israeli shekel, and Polish zloty are considered overvalued.

Key Decisions for Investors

• Given the confluence of bearish technical and fundamental signals, investors should consider maintaining or initiating short positions against the US dollar.
• Based on Bank of America's valuation model, specific pair trades to evaluate include going long the Australian and New Zealand dollars, and potentially shorting the overvalued Swiss franc, against the USD.
• For those with an emerging market focus, opportunities may exist in long positions in the identified undervalued currencies like the INR, CLP, IDR, and KRW, while exercising caution with overvalued currencies such as the TWD, ILS, and PLN.
• Investors should monitor upcoming US economic data, particularly payrolls, as the bearish dollar thesis is heavily dependent on continued macro weakness.