Bank of America Securities Stays Bearish on USD Despite Fed's Soft Landing Hopes
In the aftermath of the Federal Reserve's significant interest rate cut, the markets seem optimistic about a "soft landing" scenario. However, Bank of America Securities remains cautious and continues to advocate selling the US dollar. The central bank still has room to further lower interest rates, according to their analysis dated Sept. 26.
Front end rates, which are a key factor in foreign exchange movements, are indicating expectations of Fed easing levels comparable to previous economic downturns. This aligns with a broader narrative of a "soft landing" and reflation, as seen in the performance of risk assets. Higher-beta FX currencies are outperforming lower-beta ones, equities and gold prices are rising, credit spreads are tightening, and the longer end of the UST curve is showing bear steepening.
While Bank of America Securities sees a soft landing as the most likely scenario and anticipates a general depreciation of the USD, they also warn that the risks of a hard landing are not being adequately considered. In times of uncertainty, it is important to be cautious and aware of potential risks.
Historically, large rate movements have tended to benefit the dollar, but the specific nature of the change matters. Despite the current optimism surrounding the "soft landing" narrative, any negative news could lead to temporary USD retracements. The bank believes that the USD is currently in a "sell-the-rally" mode.
Analysis:
In simpler terms, Bank of America Securities is advising investors to be cautious about the US dollar despite the market's positive outlook after the Fed's interest rate cut. While a soft landing scenario is likely, there are still risks to consider. The performance of risk assets and the behavior of interest rates are key indicators to watch. It's essential to stay informed and be prepared for potential market fluctuations in the coming months.