USD, EUR, JPY: Divergence Ahead; What's The Trade? - BofAML

Bank of America Merrill Lynch FX Strategy Research has been arguing in many recent reports that diverging monetary policies will be positive for EUR and USD against JPY. BofAML has reiterated this view in a note today with an update on its related FX trading strategy.

"We have argued that the Fed will be hiking faster than markets expect, particularly in 2018. We also expect the ECB to announce QE tapering this fall, as they are not willing to increase the issue limit or relax the capital key-we see depo rate hikes after QE ends next year. As the BoJ remains committed to yield targeting, we would expect JPY to weaken against both USD and EUR," BofAML argues. 

What's the trade: Buy dips in EUR/JPY tactically for 129.

"We see more upside for EURJPY in the months ahead, but we would trade it tactically given how much it has already moved.. Our equilibrium EURJPY estimate is 129, but spot can move above this level during the business cycle when monetary policies diverge. The next EURJPY move could be slower and choppier, but we would be buying any dips while in a risk-on market," BofAML recommends. 

What's the trade? Buy dips in USD/JPY strategically for 120 and sell rallies above that level.

"We also see more upside for USDJPY, but it could take a little longer... We would be more concerned about US rhetoric about currency manipulation if the USD/JPY rallies decisively beyond 120, but we are not there yet. We would buy dips on the USDJPY into 120 and sell the strength above the level," BofAML adds.

EUR/JPY is trading circa 123/75 and USD/JPY circa 111.50 as of writing. 

Source: Bank of America Merrill Lynch Rates and Currencies Research