Fed To Eventually Remove The Punch Bowl: Global FX Weekly

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Global FX weekly
Fed to eventually remove the punch bowl
The View: The Fed’s hawkish pivot has confirmed our thesis that US decoupling will 18 June 2021
lead to monetary policy divergence, in turn supporting the USD. We remain USD bulls, FX Research
but warn that the path is not going to be smooth. In EM, Fed policy normalization is Global
making the PBoC’s CNY job harder, PHP and IDR vulnerable, while BRL is idiosyncratic.
Claudio Piron
USD: We see rising risks of sustained US inflation. As FX is mostly driven by central Emerging Asia FI/FX Strategist
Merrill Lynch (Singapore)
banks this year, the Fed reaction matters. Fed dovishness has been keeping the USD +65 6678 0401
down, but normalization to address inflation risks will support the USD. [email protected]
Athanasios Vamvakidis
GBP: June has not been kind to GBP as next phase of easing is delayed. But data FX Strategist
MLI (UK)
continues to print strongly. Longer-term GBP anchors have not deteriorated, suggesting +44 20 7995 0790
athanasios.vamvakidis @bofa.co m
current decline is merely position/hedging related. EUR/GBP has been a favored GBP
long, but the cross has found a base as EZ vaccine accelerates. See Team Page for List of Analysts
CHF: We expect no policy change from the SNB any time soon. FX considerations remain
the crucial policy driver. The 4Q20 current account deficit raised questions if past safe-
haven flows can reverse and CHF depreciate. We are sceptical. SNB policy may be stuck
given large asset holdings. We see more CHF underperformance.
G10 monetary policies: Debate on whether CB's are ahead/behind curve has been
conditioned by traditional policy rule analysis like the Taylor Rule. Inflation targeting
remains primary goal but some banks are moving to dual mandates. This poses a
challenge to policy rules. G10 FX tracking policy rules which focus on inflation. Outlier is
USD: pricing more consistent with focus on NAIRU gap.
Reserve Currencies: We conduct a deep dive into historical and ongoing developments
in central bank FX & Gold reserve management. The next transition may be towards a
more bifurcated world. We discuss uncertainties around continued reserve demand for
UST. The outlook for Asia reserves, hurdles & hopes for diversification into EUR, and
how / why Gold and AUD have benefited.
Bullish IDR and INR: We outline the case for IDR and INR fundamental resiliency
Long THB NEER: Post the Fed, we rotate into THB NEER from short USD/THB
Latam Fund Manager Survey: Keeping the faith in BRL
Quant. The net USD/G10 trend breadth increased from -5 to +1 post-FOMC as the USD
trends improved. The Up/Down vol is also picking up rising bullish USD momentum post-
FOMC.
Technicals: The YTD range in the BBDXY held and the USD is now in an upswing. The
top end of the range is in the 1150s. A breakout through this can confirm a double
bottom.
Trading ideas and investment strategies discussed herein may give rise to significant risk and are
not suitable for all investors. Investors should have experience in FX markets and the financial
resources to absorb any losses arising from applying these ideas or strategies.
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reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Refer to important disclosures on page 25 to 27. Analyst Certification on page 24. 12294957
Timestamp: 17 June 2021 11:00PM EDT
Our medium-term views
Michalis Rousakis Claudio Piron
MLI (UK) Merrill Lynch (Singapore)
[email protected] [email protected]
Exhibit 1: Our medium-term views

G10 and EM FX medium-term views
G10 We expect a trend of USD appreciation to resume this year. Our USD view reflects the US growth outperformance on the back of the substantial US
fiscal support and the earlier US reopening, which will eventually lead to Fed policy normalization. We retain a EUR bearish bias. Near-term EUR risks are
the summer tourist season and the ECB Strategy Review this fall; further out, we focus on the rollout of the EU Recovery Fund and the reform of the EU
fiscal rules next year. We look for a weaker JPY in the second half of this year due to the revival of Japan’s outward M&A and higher US rates. We expect
GBP to stay supported near term, particularly vs. USD and CHF, but Brexit makes us long-term bearish. We remain generally bearish on CHF and
constructive on the commodity block. We still prefer relative value and tactical trades.
EM The optimistic outlook for EM FX was given a rude awakening by the Fed FOMC’s hawkish tone that is lending strength to the USD. Nonetheless, CNY strength is
anchoring Asian currencies and resulting from a sustained trade and current account surplus. If there is a weak spot in EM FX it is the ongoing vaccination rollout and
higher beta currencies that are more sensitive to higher US real rates (PHP, IDR and INR). However, at the margin this also appears to be improving with India’s case
infections receding and China’s vaccination rate ramping up to 20 million per day, for example. In Asia, we like long CNH/SGD and short USD/CNH. We also like long
commodity based MYR (proxied with short-term bonds) and IDR. In EEMEA, we remain long EGP, KES and KZT. In LatAm, we like long MXN/CLP.
Source: BofA Global Research
BofA GLOBAL RESEARCH
Our key forecasts

Exhibit 2: Key BofA G10 and EM FX forecasts
Forecasts as of 17-June-2021
(EOP) 2020 1Q21 2Q21 3Q21 4Q21
EUR/USD 1.22 1.17 1.18 1.16 1.15
USD/JPY 103.25 110.72 107.00 110.00 113.00
GBP/USD 1.37 1.38 1.35 1.33 1.31
AUD/USD 0.77 0.76 0.75 0.76 0.78
USD/CNY 6.53 6.55 6.40 6.30 6.20
USD/BRL 5.20 5.72 5.20 5.20 5.20
USD/INR 73.07 73.11 72.00 71.50 71.00
USD/RUB 74.41 75.69 72.00 70.00 68.00
Source: BofA Global Research. Forecasts as of 17-June-2021.
What we particularly like right now

Exhibit 3: Our latest G10 and EM FX trade recommendations
What we particularly like right now
G10
Sell GBP/JPY calendar spread Current cross-JPY uptrends face tactical near-term resistance, but FDI and portfolio investment remain unsupportive for JPY over medium-term.
Buy EUR/CHF via 1x2 call spread EUR/CHF likely lagging broader moves in its traditional anchors and most importantly German bund yields.
Buy USD/SEK via 6m 1x2 call spread The US outperformance; the prospect of higher relative yields and hedging against risk-off are the key reasons behind this trade.
EM
Long USD put, INR call ratio spread We enter long INR with a USD put ratio spread to position for cleaner positioning and carry post Fed
Long 12M vs 1M PHP NDF points Stay short 12M PHP NDF position, but long 1M PHP to offset negative carry of bearish PHP. Negative real rates and inflation risks motivate trade.
Long CNY 6M-15delta strangle We enter long CNY vol as PBOC FX reserve balance sheet is static, while FX risk accumulates on corporate balance sheets
Sell EUR/BRL lower political uncertainty and start of hiking cycle will re-anchor BRL
Buy MXN/CLP MXN to keep positive momentum into the June 6 midterms. CLP crowded. Attractive carry differential.
Short EUR/PLN Polish fundamentals are among most robust in EEMEA (strong current account, decent growth recovery, and cheap FX valuations)
Short USD/RUB Undervalued, lagged oil recovery and we expect pricing out of excessive geopolitical premium
Short USD/EGP High carry, solid fundamentals, tourism & GBI EM index tailwinds
Short USD / KZT diversification trade that benefits from oil recovery and supportive domestic dynamics
Short USD/KES IMF loan & Eurobonds boosting FX reserves, prospective upside from tourism and wider growth recovery, high carry
Short EUR/HUF more hawkish turn from NBH, structurally favourable positioning , European reflation
Short USD/UAH high carry, IMF progress expected
For complete list of open and closed trades, please see here
2 Global FX weekly | 18 June 2021

Calls at a glance
Michalis Rousakis
MLI (UK)
[email protected]
Thematic calls
• A gradual global recovery: The gradual global (albeit uneven) economic recovery
as economies reopen has gradually shifted the focus towards the timing of policy
normalization, with the Fed stance being a key risk factor.
• US fiscal: The US fiscal stimulus is by far the largest in G10, while the proposed
spending in the (partly tax-financed) “American Jobs Plan” and “American Families
Plan” is ca. $4tn. We expect this to support USD this year and possibly next.
• Fed: The Fed is on track to announce tapering at an upcoming meeting – we
continue to think the September meeting is most likely with tapering beginning at
the turn of the year.
• ECB: We believe the ECB is a key theme for EUR this year. The ECB is facing big
challenges, with limited tools. The Strategy Review is supposed to propose a plan,
but we don’t see easy solutions. It is also not clear which way it will affect the EUR,
as ECB policy easing often ends up supporting EUR by supporting the periphery.
• EU fiscal policy: The successful and efficient spending of the EU Recovery Fund,
starting later this year and extending for the next 6 years, will be important for the
periphery growth. We also focus on the reform of the EU fiscal rules next year.
• Flows & positioning: Both real money and hedge funds selling USD and EUR to
buy EM in recent weeks (see flows report).
Central Bank calls

Exhibit 4: Central Bank calls
Upcoming meetings: BoE is meeting next week
Country Next Meeting BofA Consensus Prior Narrative
US 28-Jul 0.00% 0.00% 0.00% The Fed is on track to announce tapering at an upcoming meeting – we continue to think the September
meeting is most likely with tapering beginning at the turn of the year. We look for additional details to be
released in the minutes of the meeting.
Eurozone 22-Jul -0.50% -0.50% -0.50% The ECB did not taper PEPP at the June meeting, but it significantly upgraded its GDP outlook and suggested
risks are balanced. The much better GDP forecasts and the excessive emphasis on the tiny improvement in
the Core CPI outlook suggests the ECB is setting the stage for tapering which could come in September.
Japan 18-Jun -0.10% -0.10% -0.10% Having concluded a roughly once-every-two year policy “review” and delivered another round of operational
tweaks only in March, the BoJ is likely to stay quiet for the foreseeable future.
UK 26-Jun 0.10% 0.10% 0.10% A 2Q 2022 rate hike could look increasingly plausible as growth and inflation surge.
Canada 14-Jul 0.25% 0.25% 0.25% The next reduction in the pace of bond purchases could happen at the July 14 meeting, although that depends
on how fast economic data turns around. We continue to expect the BoC to keep the policy rate on hold at
0.25% this year and at least most of next year. We expect the first hike in 2023, but it could also happen at the
end of 2022. In part, it depends on the Fed, with the BoC trying to anticipate it.
Australia 6-Jul 0.10% 0.10% 0.10% In July we expect the RBA to not extend the 3-year yield target beyond Apr-2024, but the RBA looks likely to
adopt a more flexible and data-dependent approach to QE. Considerable stimulus will likely remain in place. A
third QE round is likely to commence at the current pace of AUD5bn/week, with purchases reaching AUD60bn
after 3 months. We still see RBA rate hikes at end-2023 in light of our view of Fed rate hikes in 2H 2023.
New Zealand 14-Jul 0.25% 0.25% 0.25% The RBNZ kept its bond programme unchanged at its May meeting, but it sees the average Official Cash Rate
(OCR) starting to rise from 2Q 2022.
Switzerland 23-Sep -0.75% -0.75% -0.75% We expect the SNB to remain on hold, and FX interventions are likely to remain its main policy tool.
Norway 19-Aug 0.00% 0.00% 0.00% We expect the Norges Bank to hike in September.
Sweden 1-Jul 0.00% 0.00% 0.00% We expect the Riksbank to remain on hold in the foreseeable future.
Source: BofA Global Research, Bloomberg consensus forecasts
Global FX weekly | 18 June 2021 3

The view
Athanasios Vamvakidis Claudio Piron
After the Fed pivot

The Fed surprised markets this week with a hawkish meeting. The Dots brought hikes
forward. Their inflation forecasts flagged upside risks after base effects. Powell’s tone
in particular was very positive, acknowledging inflation risks and repeating a number of
times that he expected a “very, very” strong improvement of the labor market. He also
made it clear that this was the meeting in which they finally started “talking about
talking about QE tapering” and retired the term.
Consistent with our view, the USD rallied in response. We have been short EURUSD,
against the bearish UDS consensus, on the back of US decoupling from the massive
fiscal stimulus. Before the FOMC this week, we argued that the Fed dovishness was the
only reason that was keeping the USD weak (see USD at an inflation crossroads 15 June
2021). Not anymore.
Although we remain constructive on the USD post-FOMC, we would also urge for
caution as we still see too many moving parts. We would not expect the USD path to be
smooth. Data can be volatile given strong base effects. Inflation in particular will start
coming down after the base effects are behind and could take few more months to have
a better picture of the extent to which some inflation may be more persistent. The Fed
policy normalization will be very slow and the overall policy stance will remain very loose
during the process. European data is also now improving during the reopening. Summer
seasonality is good for the EUR, although this depends on the summer season which
remains subject to risks as long as the pandemic is not over. The ECB Strategy Review
this September is another important known unknown, and as we have been arguing, it
could go either way for the EUR (see Global FX Weekly: Hot in here 11 June 2021).
We also don’t necessarily expect the USD to rally across the board. This would depend
on risk sentiment. Assuming a slow Fed policy normalization, and during a strong global
recovery from the pandemic, we would expect risk assets to remain supported, which in
turn means high beta currencies should continue doing well. Our main call remains for
USD strength during Fed policy normalization, but against currencies of central banks
that will not be normalizing monetary policies any time soon, including EUR, CHF and
JPY.
In this context, we reiterate that US inflation is the most important call for the rest of
the year. We have been concerned that some of the recent increase may be more
persistent. If the market starts pricing such risks more, inflation expectations will
respond accordingly, which could then lead to a faster Fed tightening cycle, in turn
suggesting a more challenging outlook for risk. Our US economists have just introduced
a US transitory inflation meter that they will be updating monthly (see Introducing the
BofA US transitory inflation meter 17 June 2021). We will be following it closely.
EM FX - The Fed gets real

The Fed's uninvited hawkishness at its FOMC meeting triggered a 20bps sell-off in
higher US real rates and a rally in the USD. However, it also reveals two important
features of EM FX dynamics.
The first is that the FX market is discriminating emerging markets on a case by case,
with some currencies such as BRL doing better than others ZAR.

The second issue is that the broader based support for the USD relative to EM FX is
problematic for CNY as the CFETS basket inches to 98.065 on a fixing basis, just shy of
the year’s May 31 high of 98.21.
This will further complicate the PBoC’s effort to contain CNY appreciation as
neighboring EM Asia currencies are on an even weaker footing, thereby aggravating CNY
strength further on a trade-weighted basis.
This tensions will continue to play well to our May 7 recommendation to be (see report)
short SGD vs. CNH on a 3M basis, with the SGD effectively being pegged to its MAS
NEER neutral policy stance. Also note that we have rotated our bullish THB position
against USD into a (see report) long THB NEER position to be more defensive against
USD strength.
The spectrum of real rates in EM FX

Exhibit 5 shows the correlation of weekly changes in 5yr US real rates with weekly
changes in EM currencies. PHP, INR and IDR weakness stand out as being most
correlated with higher US real year rates. This is broadly consistent with the post Fed
price action, though the 1.2% sell off in KRW against USD, appears unwarranted given
the chart.
Returning to BRL, this appears to have little correlation with US 5yr real yields and
driven more by the Brazilian central bank idiosyncratic monetary policy rate hikes. At the
furthest extreme we have TWD and MYR strength correlating with higher US real rates.
This would likely reflect their heavy dependency on global export demand and ultimately
US demand, which is consistent with higher US real yields.
Exhibit 5: Year-to-date correlation of weekly changes in US5yr real yields and EM FX weekly
changes
PHP, INR and IDR weakness appears most correlated with higher 5yr real rates, while KRW, TWD and
MYR not
80%
YTD correlation with US real rates
60%
40%
20%
0%
-20%
-40%
-60%
PHP INR IDR THB CLP ZAR CNY MXN PLN RUB BRL TRY COP SGD KRW TWD MYR
Source: BofA Global Research, Bloomberg
What we like in EM FX
In Asia, we like long CNH/SGD and short USD/CNH. We also like long commodity based
MYR (proxied with short-term bonds) and enter long THB on a NEER basis. In EEMEA, we
remain long RUB, EGP, KES and KZT. We have closed our long positions in HUF and PLN
vs EUR and short USD/UAH. In LatAm, we like long MXN/CLP.

USD at an inflation crossroads
Athanasios Vamvakidis Ben Randol
MLI (UK) BofAS
Link to the full report: Liquid Insight: USD at an inflation crossroads 15 June 2021
• We see rising risks of sustained US inflation. As FX is mostly driven by central banks

this year, the Fed reaction matters.
• Fed dovishness keeps the USD down, but normalization to address inflation risks
could support the USD later this year.
Inflation scare
Following another strong inflation surprise in the US last week, we are increasingly
concerned. To a large extent, high US inflation has to do with the massive US fiscal
stimulus. Inflation has been increasing in most of G10, but the US clearly stands out.
The implications of higher US inflation for the USD depend on the Fed. The Chart of the
Day shows that FX performance and central bank hawkishness are strongly correlated
this year. Assuming that some of the recent increase in inflation is indeed sustained, we
would argue that the Fed will react to it, supporting the USD later this year.
Exhibit 6: Central bank hawkishness and FX performance in 2021

Extent to which G10 central banks are hawkish or not explains FX this year
6
CAD
4 GBP NOK
2
Performance in 2021
AUD
0 USD NZD
SEK EUR
CHF
-2
-4
-6 JPY
-8
0 2 4 6 8 10 12
Hawkishness ranking
Source: BofA Global Research.

Sterling stumbles
Kamal Sharma
MLI (UK)
[email protected]
Link to the full report: Liquid Insight: Sterling stumbles 17 June 2021
• As we had flagged, June has not been kind to GBP as next phase of easing is
delayed. But data continues to print strongly
• Longer-term GBP anchors have not deteriorated, suggesting current decline is

merely position/ hedging related
• EUR/GBP has been a favored GBP long but we reiterate our view that the cross has
now found a base as EZ vaccine accelerates
Dose of reality
June has not been kind to GBP which is currently the second worst performing currency
in the G10 FX space. We had flagged in a report last month (Liquid Insight: GBP:
Smelling of Roses 18 May 2021) that the spread of the Delta variant was a near-term
risk to the pound which at least warranted some hedging of underlying bullish GBP
views. In the meantime, UK macro data continues to strengthen and the positive
tailwinds from previously announced re-opening measures should underpin the recovery.
However, we reiterate that the outlook for GBP is likely to be more symmetric than it
was in 1Q. In particular, this latest mini-setback further reduces the divergence between
the Eurozone and the UK and provides further support to our argument that EUR/GBP
has now based. We continue to focus our bullish GBP views versus low yielders such as
CHF and JPY.
Exhibit 7: GBP TWI versus RICS House Price Balance
House price inflation should support further GBP gains
120 100
80
60
110 40
20
0
-20
100 -40
-60
GBP TWI (LHS) RICS Balance (RHS) -80
90 -100
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021


Switzerland: Short term answers, longer
term questions
Evelyn Herrmann Ronald Man
BofASE (France) MLI (UK)
Myria Kyriacou Kamal Sharma

BofASE (France) MLI (UK)
Link to the full report: European Macro Viewpoint: Switzerland: Short term answers,
longer term questions 15 June 2021
Policy on hold, 2Q21 edition

We expect the SNB to keep policy unchanged this week, again. The central bank seems
on a predictable trajectory: deposit rates stuck at -75bp, discretionary FX interventions
to fend off CHF appreciation when perceived safe-haven inflows exert pressure, even if
the next few months should be calmer for the SNB given (hopefully) declining
uncertainty around short term pandemic developments.
Keep an eye on the balance of payments

Our SNB call assumes CHF to remain subject to relatively persistent upward pressure,
both from continued current account surpluses, the risk of renewed perceived safe haven
inflows and very limited evidence of their reversal over time. Yet, the 4Q20 current
account deficit captured some attention. We don't think a negative current account is
the new normal, but within the current account, "primary income" has more durably
moved from surplus to deficit since 2015, potentially more persistently reducing the
surplus. That probably reflects the SNB's rising role in Switzerland's international asset
position, and it's very different asset allocation than the private sector (less direct
investment, more high rated government bonds).
Constructive on CHF front-end rates

In the absence of intervention to contain CHF depreciation, we believe the SNB's
balance sheet is unlikely to shrink meaningfully. This would mean the large stock of sight
deposits held by banks in Switzerland will sustain, if not continue to grow, over the
medium term. A cash rich banking system would keep front-end CHF rates well
anchored. But foreign currency bonds could be less supported than before, if the SNB
reallocate its foreign assets.
No easy way out

Our call has been for long that the SNB would try to allow a very gradual and very slow
CHF appreciation. Because there is neither a quantified CHF target nor a pre-defined
pace of intervention, this shift wouldn't actually need a proper policy announcement. But
it's not a no-brainer, either. SNB policy may really be stuck. The economy and in fact the
central bank's balance sheet and profits are vulnerable to CHF appreciation or to a move
higher in global yields, but increasing the balance sheet further to provoke CHF
depreciation would risk to simply aggravate these vulnerabilities. Though unlikely, rising
domestic inflationary pressures could more seriously challenge the SNB's policy stance.
Domestic politics, including recurring referenda on the SNB, could become a weak spot
if the central bank's profits on its international asset holdings started to disappoint.

What Policy Rule is G10 FX Pricing?
Kamal Sharma
MLI (UK)
[email protected]
Link to the full report: FX Viewpoint: What Policy Rule is G10 FX Pricing? 14 June 2021
We are all central bank watchers now

Central bank policy normalisation has been the key focus for markets this year against
the backdrop of the strong rebound in global growth and hefty fiscal stimulus. However,
some central banks appear to be more willing than others in embracing policy
normalisation and G10 FX performance has subsequently reflected these respective
shifts. The debate on whether central banks are ahead/behind the curve has, to some
extent, been conditioned by traditional policy rules based analysis and what central
banks should do "in theory". The most famous of these is the Taylor Rule but whilst
traditional policy rules were effective in guiding the policy rates and markets before the
financial crisis, the era of unconventional monetary policy has stretched the usefulness
of these rules. Nonetheless, some central bankers remain strong advocates of rule based
measures.
A challenge for the ages

The challenges faced by many central banks will continue for many years and will
inevitably impact G10 FX trends as they have done in 2021. At the same time, the
debate on the optimal policy rule will no doubt continue in policy and academic circles as
many central banks undertake strategic policy reviews. Whilst inflation targeting remains
the primary policy goal for the bulk of G10 FX, markets are grappling with the move by
some towards dual mandates. This has implications for how policy rules work and how
FX markets are impacted. Our aim in this note is not to recreate the wheel on the
existing research on policy rules. Our focus here is how a perceived shift in emphasis has
altered the way in which FX markets interpret policy rules.
One size does not fit all

We concede that degree of uncertainty around policy rule analysis is high, not least due
to limited data on r* and, to a lesser extent, NAIRU. We present a stylized framework
using a standard Taylor Rule to ask the following the question: what type of policy rule is
G10 FX following? Using 1yr FX TWI performance, we find that for many central banks, a
traditional TR with a higher coefficient on inflation versus unemployment has done a
good job in predicting price action. G10 FX outperformance this year for GBP, NOK and
CAD on the one hand and underperformance in JPY and CHF on the other. EUR and SEK
performance are broadly consistent but standard TR analysis suggest that both
currencies are likely to struggle to make further gains in the absence of a central bank
pivot.
The outlier has been USD - traditional TR rules would suggest USD should have traded
strongly over the past year. Our key conclusion is that the shift in the Fed's reaction
function to one which more formally incorporates unemployment along with flexible
average inflation targeting has diluted the inflation coefficient in the TR. Results for
USD improve as a larger weight is place on unemployment rate deviation versus inflation
Indeed, assigning a zero weight to inflation deviation from target and +1.5 on
unemployment deviation from NAIRU would be more consistent with USD price action
over the past year. The Fed may have just got its message across as far as FX is
concerned.

A Primer on Reserve Currencies
Kamal Sharma Claudio Piron
Link to the full report: Global Rates and FX Primer: A Primer on Reserve Currencies 17
June 2021
A deep dive into reserve currencies

We present a comprehensive overview of the history, theory and ongoing developments
in global central bank reserves. Reserve currencies can be traced back to the 5th Century
B.C but it was not until the 19th Century that we saw a more disciplined reserve
currency system. By the law of averages, USD's hegemony as a reserve currency may be
in the mature phase. The case study of the transition from GBP to USD provides crucial
insights, and we believe that the next transition could be towards a more bifurcated
world based on regional trading zones. IMF SDR baskets could provide one solution to
the Triffin Dilemma.
USD: The slow drift

The drift away from the USD as a reserve currency has been evident for some time and
forms a crucial pillar in our de-dollarisation thesis. We think this is likely to be a slow but
secular trend. Despite the change in Administration, ongoing geopolitical tensions
between the US and countries such as Russia and China will likely reinforce the search
for alternatives.
Asia: Insatiable Reserve Accumulation

USD/Asia currency pegs may be a thing of the past, but the dominance of USD remains
intact due to the insatiable accumulation by Asian reserve managers. Asian reserves ex
Japan are now on a par with China. Geopolitics are likely to play an increasing role and
alternatives range from idealism and nostalgia to a more multipolar, regionalized world.
Improving the use of RMB in cross-border payments is one important step.
EUR: The ESG Angle?

Despite the ongoing de-dollarisation, the share of EUR holdings in COFER has not
materially increased. This could change given the relevance of EUR in the ESG bond
space, and the start of NGEU issuance, which will represent a significant change in the
composition of the EUR fixed income market. However, the main challenges remain the
negative and comparatively low Euro yields, and the limited free float in high quality
paper.
Gold: The big gainer

Central banks have long been significant participants in the gold market but their
motivations suggest that wealth creation is not the primary objective. Reserve
accumulation in gold has outpaced FX reserve growth and the metal has been a key
alternative to USD. Wealth preservation, rather than wealth creation are key drivers.
AUD: The new diversifier?

Strong fundamentals, AAA ratings, exposure to Asia, and high yields are all drivers of
increased reserve activity in AUD. Liquidity has also improved in the local bond market.
Around two-thirds of the top 50 largest reserves managers have indicated that they hold
AGS. A longer-term risk to AUD reserves holding could come from greater focus on ESG
criteria. Australia is a major exporter of carbon via coal and natural gas.

Asia FX - Bullish on IDR and INR
Abhay Gupta
[email protected]
Full Report - Emerging Insight: Asia FX – Bullish on IDR, INR and THB
We maintain our constructive view on Asia FX with strong fundamentals in INR and IDR
with positive flow picture. Conversion of onshore USD deposits could eventually set the
backdrop for IDR to rally towards our target of 14,000 by year end. INR fundamentals
remain strong due to broadly balanced basic balance and supportive equity portfolio
inflows on surging IPO activity. We also see potential for turnaround in THB as faster
vaccination with focus on tourism and export oriented provinces could bring forward
reopening of tourism hotspots.
Exhibit 8: Asian FX total return since 2020 beginning (as of 11 Jun’21)
THB to bridge the underperformance while IDR and INR still good candidates for carry returns
CNY
PHP
TWD
KRW
Spot Return % Carry %
INR
IDR
MYR
SGD
HKD
THB
-4 -2 0 2 4 6 8 10 12 14
Indonesia FX – Bullish risks from rising dollar surplus

After the volatility in 1Q, BI focus has shifted from encouraging IDR strength towards
stability and managing volatility. This is reflected in the removal of statement about
“IDR being fundamentally undervalued” from the policy meeting statements recently.
We maintain a positive outlook on IDR based on improving terms of trade as prices of

key commodity exports have increased leading to YTD exports being 24% higher than
2019 levels. Imports are only higher by around 5% which is partly a reflection of
persisting weakness in domestic demand due to slow vaccination rates. YTD trade
surplus are currently tracking 2020 average and even with some improvement in
domestic demand, our economist expects CA deficit for 2021 at around -0.6% deficit,
which is comfortably covered by net FDI.
Risks to IDR outlook arise from its sensitivity to external conditions, including tightening
in USD conditions and higher US rates from tapering expectations. Another point of note
has been the slow accretion of FX reserves in Indonesia compared to rest of the region.
In 2020, gross FX reserves only went up by USD 7bn and YTD around USD 3bn, which
matches the increase in liabilities from external debt issuance.
Rising onshore dollar deposits

Despite the slow increase in headline reserves, we saw a sharp improvement in domestic
banks’ FX liquidity last year and expect this to continue into this year. Driven by the
repayment of FX loans and a lowering of the FX reserve requirement ratio in Mar’20 in

response to tighter USD liquidity, net excess FX deposits in the banking system have
increased to USD 14.4 bn, as per our estimates.
Partially driven by lower conversion ratio of export proceeds expecting stronger USD,
this could be a driver behind lower demand for DNDF auctions for forward hedging
recently. Conversion of these deposits create conditions for sustained appreciation of
IDR beyond 14000 this year and beyond.
After the sharp increase in offshore hedging costs in 1Q, implied yields have stabilized
closer to onshore yields around 3-4% range, improving hedged yield on IndoGB curve for
offshore investors.
India FX – Strong fundamentals

Despite some widening in CA deficit this year to 1% due to improving domestic demand,
we expect FDI to cover the shortfall and overall BoP surplus around USD 34bn. Equity
inflows are USD 5.8bn YTD (as of May end) despite the outflows in 2q. Foreign
ownership for bonds has declined substantially over last year so further outflows have
subsided over the last few months. Foreign portfolio inflows may return once fiscal
deficit has peaked and investors feel more confident about demand-supply of bonds.
Exhibit 10 shows that RBI’s purchases in spot and forward markets are keeping a tab on
excessive appreciation of INR. RBI leaned against INR depreciation in apr by selling over
USD10bn net in forwards. On REER metrics (Exhibit 9), INR has been range bound as
policy makers closely watch excessive appreciation and absorb any inflows to build
buffer against future volatility. Overall, these steps should keep volatility low in INR and
improve its appeal for carry.
While hedging costs for foreign investors come down to around 4.5% implied yield on
3m NDF (as of 15th June 2021), it is still elevated compared to onshore 3m rate around
3.5%. As RBI’s forward position had increased to over USD65bn (as of Apr 2021), which
was keeping FX implied yields elevated. RBI may have temporarily switched to spot
intervention to reduce forward premium and improve banking system liquidity, which led
to sharp move lower in forward points earlier this month.
Exhibit 9: BIS REER Index for INR Exhibit 10: RBI FX Purchases in spot and FWD
INR REER has been range bound with room to appreciate RBI has intervened both ways on excessive moves
108 30 80
BIS REER USD Bn RBI Spot Purchases (est)
RBI FWD Purchases
USDINR (rhs)
20
75
102
10
70
0
96
65
-10
90 -20 60
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20
Source: BofA Global Research, BIS, Bloomberg Source: BofA Global Research, Bloomberg
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

LatAm – more re-opening, more optimism
David Beker >>
Merrill Lynch (Brazil)
[email protected]
Full Report - LatAm Fund Manager Survey: More re-opening, more optimism
Brazil optimism surge: Ibov >130k; BRL <5.10; GDP >4%

Investors in our survey turned significantly more bullish this month, as they expect
higher equity prices (75% say Ibov >130k by year end, up from 42% last month), a
stronger BRL (85% see it <5.10 by year-end, up from 30% last month) and stronger GDP
growth (55% say GDP growth >4% in 2021, vs only 15% previously, Exhibit 15).
Vaccination/reopening remains the biggest positive trigger. Half do not see estimates
for reopening stories as too optimistic (but the other half has divided opinions). The
most overweight sector is now Financials, followed by Materials and C. Discretionary
(possibly linked to the reopening). Cash levels are close to historical average.
Inflation concerns and hawkish Central Bank in Brazil

The Fed making a policy mistake remains the biggest tail risk for LatAm (36%, Exhibit
12). A harsher stance from the Central Bank is already anticipated in Brazil, as most of
the survey participants now expect selic to end the year in the 6-6.75% range and
believe the Copom will adopt a more hawkish tone at this week´s meeting
communication (Exhibit 12). Hikes are a key focus for equity markets, as 72% say selic
would need to be at least 7% to make inflows into equities stop.
Bullish sentiment could be peaking in Mexico

Participants are also more constructive on Mexico. 42% expect equities to outperform
(vs 30% last month and highest since March). 58% expect GDP growth >5%, vs only 36%
last month. 78% expect sentiment to remain stable or improve. Only 27% expect Mexico
to lose inv. grade eventually (the lowest since we first asked the question in Jan-19). On
the other hand, the downward spiral regarding Chile sentiment continues, with only 15%
expecting it to improve over the next six months.
Exhibit 11: When do you expect the Brazilian Central Bank to remove the wording on “partial
monetary policy normalization”?
Participants believe the Central Bank will adopt a more hawkish tone in its next meeting
It will be removed in the September Copom
meeting
It will be removed in the August Copom meeting
It will be removed in the next Copom meeting in
June
It will remain in place this year
0% 10% 20% 30% 40%

Source: LatAm Fund Manager Survey

Exhibit 12: What do you consider the biggest tail risk for LatAm Exhibit 13: What kind of recovery do you believe markets are pricing
markets? in?
Fed policy mistake remains the biggest tail risk. Participants also highlighted 42% believe the market is pricing a recovery for 1H22, but optimism for
a COVID-19 third wave and rising inflation. 2021 is growing.
Fed policy mistake Back to pre-pandemic levels in

2H22
China and commodities
Back to pre-pandemic levels in
Strong USD 1H22
Coronavirus Back to pre-pandemic levels in
4Q21
Slow vaccination
Back to pre-pandemic levels in
US Slowdown 3Q21
Jun-21 Jun-21
Other No reocovery in the near future
May-21 May-21
0% 10% 20% 30% 40% 50%
0% 10% 20% 30% 40% 50%
Source: LatAm Fund Manager Survey Source: LatAm Fund Manager Survey
Exhibit 14: What currency do you think will outperform over the next 6 Exhibit 15: In Brazil, what do you expect for GDP growth in 2021?
months? Expectations on Brazil GDP improved. 55% now expect GDP to grow above
55% expect the BRL to outperform. 4%, vs only 15% last month.
Brazilian Real (BRL) Increase above 4%

Mexican Peso (MXN)
Increase between 3% and 4%
Euro (EUR)
US Dollar (USD) Increase between 2% and 3%

Chinese Renmimbi (CNH)
Jun-21
Jun-21 Increase between 1% and 2%
Japanese Yen (JPY) May-21
May-21
0% 10% 20% 30% 40% 50% 60% 0% 20% 40% 60%
Exhibit 16: What do you consider the biggest tail risk for Brazil? Exhibit 17: Where do you see the BRL at the end of 2021?
Fiscal remains the biggest tail risk for Brazil. Participants are more optimistic on the BRL. 85% expect it below 5.10, up
from 30% last month.
Uncontrolled fiscal…
Between 5.31 - 5.60
Political noise
Between 5.11 - 5.30
Delayed/slow vaccination
Between 4.81 - 5.10
Coronavirus
China/commodities Between 4.51 - 4.80

Jun-21 Jun-21
BRL depreciation Below 4.50 May-21
May-21
0% 20% 40% 60% 0% 10% 20% 30% 40% 50% 60%

THB – Converting into long NEER to
reduce risk from USD appreciation
Abhay Gupta
[email protected]
Full Report: EM Alpha: Closing MYR vs. KRW and short PHP trades
Converting Long THB vs USD into Long THB NEER

We recently entered Long THB vs USD (entry 31.16, current 31.355, target 30.2, stop
31.5, (see report) EM Alpha: Thailand FX – Bridging the performance gap 15 June 2021)
on potential for surprise from faster tourism recovery and support for economy from
fiscal handouts. Recent progress on vaccination indicates that daily vaccination rate has
turned up to 300k average over 7th Jun – 16th Jun period, compared to average of 70k in
May’21.
We maintain our view that faster pace of vaccination with focus on tourism and export
oriented provinces will allow export earnings from tourism to recover towards the end of
this year and set the stage for a full recovery in 2022(See Exhibit 18).
However, changes in the US policy outlook with a more hawkish tone from Fed could
create more volatility in USD leg of this trade. (See our report US Watch: Fed: Retire the
term 16 June 2021). Given the idiosyncratic nature of the trade linked to recovery in
Thailand’s domestic economy, we believe this trade is best expressed as Long THB
NEER.
We close our original trade at THB/USD level 31.355, and enter Long THB NEER (entry
spot 112.27, 3m fwd 112.21, target 115, stop 111) to reduce the risk from broad USD
appreciation. Risks to the trade: Slow implementation of mass vaccination program.
Exhibit 18: Total doses administered and daily doses
Vaccination rate has picked up sharply over last 10 days
8 800
Daily doses (thousands, rhs) Total Doses (thousands)
Millions
6 600
4 400
2 200
0 0
4/1/2021 4/15/2021 4/29/2021 5/13/2021 5/27/2021 6/10/2021
We maintain our view that faster pace of vaccination with focus on tourism and export
oriented provinces will allow export earnings from tourism to recover towards end of
this year and set the stage for a full recovery in 2022.
However, changes in the US policy outlook with a more hawkish tone from Fed could
create more volatility in USD leg of this trade. (See our report US Watch: Fed: Retire the
term 16 June 2021). Given the idiosyncratic nature of the trade linked to recovery in

Thailand’s domestic economy, we believe this trade is best expressed as Long THB
NEER.
We close our original trade at THB/USD level 31.355, and enter Long THB NEER (entry
spot 112.27, 3m fwd 112.21, target 115, stop 111) to reduce the risk from broad USD
appreciation. Risks to the trade: Slow implementation of mass vaccination program.
NEER Index Weights

We use Thailand’s exports over 2016-2020 period to construct a NEER index based on
the weights below. We use SGD as a more liquid proxy for MYR and USD as proxy for
other markets which include Thailand’s neighboring ASEAN countries and Middle-east,
amongst others. Exhibit 20 shows that our NEER index tracks BoT’s NEER index broadly
over the past 5 year period, with some divergence due to proxies used in our index to
make it easily tradable.
Exhibit 19:Weights used for NEER basket vs exports weight Exhibit 20: BofA THB NEER performance vs BoT THB NEER
Using SGD as proxy for MYR and USD for rest of less liquid Deviation from BoT due to proxies used in BofA NEER basket
currencies
125
FX Exports Weight Final NEER weights
JPY 9.7% 9.7% BoT THB NEER BOFA THB NEER
USD 12.2% 47.8%
EUR 8.7% 8.7%
IDR 3.7% 3.7%
MYR 4.8% 0.0%
PHP 2.8% 2.8%
115
SGD 3.8% 8.8%
AUD 4.4% 4.4%
INR 2.3% 2.3%
CNY 12.0% 12.0%
Others 35.6% 0.0%
Total 64% 100% 105
95
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Quant Insight
USD is improving
• The net USD/G10 MAA breadth rose from -5 to +1 post-FOMC as the USD trends
had picked up
• The Up/Down vol has started to pickup rising upside USD momentum post-FOMC
USD trends have improved post-FOMC

Before FOMC the overall USD trend was very negative with USD descending against 6
currencies and rising only against the JPY. The net USD/G10 MAA breadth rose from -5
to +1 post-FOMC as the USD trends had picked up (Exhibit 5). EURUSD, USDCHF,
USDSEK and USDNOK had changed from a negative USD trend to a sideways trend. In
addition, AUDUSD and NZDUSD sideways trends became downtrends favoring USD.
Bullish USD
Before FOMC, our positioning model saw USD/CHF shorts most at risk (FX Quant Trader,
14 June 2021). Positioning was stretched with MAA below 20 and up/down vol and
residual skew below 20th percentile, showing a bullish reversal signal for USD/CHF
(Exhibit 5). Indeed, we saw USD/CHF rising with MAA going from +18 to +43, changing a
downtrend into a sideways trend. Post-FOMC, the model is bullish USD/JPY, expecting
the uptrend to continue. The Up/Down vol has started to pick up rising upside USD
momentum post-FOMC, which used to lean bearish USD pre-FOMC.
Exhibit 21: USD breadth rose to +1 from -5 last week

USD/G10 long-term MAA breadth
10
-5
-10
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
USD/G10 MAA breadth Oversold Overbought

Exhibit 22: Before FOMC, USD/CHF shorts were most at risk Exhibit 23: After FOMC, bullish USD/JPY
USD/G10 positioning analysis before FOMC USD/G10 positioning analysis after FOMC
EURUSD
Trend
↑
Risk of Reversal
LOW
MAA
71
UD
81
RS
80 EURUSD ↔
Trend
↑
Risk of Reversal
NO TREND
MAA
54
UD
96
RS
79
USDJPY
GBPUSD
↑
↑
LOW
LOW
96
79
63
73
25
78
USDJPY
GBPUSD ↑
↓
LOW
LOW
100
64
21
57
21
76
↔
AUDUSD ↔ NO TREND 50 63 16 AUDUSD LOW 36 60 24
↓
USDCHF ↓ HIGH 18 13 12 USDCHF NO TREND 43 1 13
↓
↓
USDCAD LOW 29 12 73 USDCAD LOW 39 17 70
NZDUSD ↔ NO TREND 50 60 17
USDSEK
USDNOK
↓
↓
LOW
MEDIUM
18
14
30
16
22
24
NZDUSD
USDSEK
USDNOK
↔
↔
LOW
NO TREND
NO TREND
39
46
50
48
19
11
22
25
23

Technical Strategy
Paul Ciana, CMT
BofAS
[email protected]
• The USD rallied broadly this week and the Bloomberg US dollar index reflects it well.
The index held the YTD lows and impulsively rallied up through the moving averages.
• By definition the BBDXY is still in a range with resistance at 1156 and support at
1112. However this rally raises the prospects of a big double bottom in 3Q21.
BBDXY range holds, double bottom watch in 3Q21

There are three technical takeaways to the USD rally this week as measured on the
BBDXY chart below. 1) The Q2 lows did not break the Q1 lows and so range support
remains at 1112. 2) The impulsive rally broke above multiple moving averages, reached
overbought and MACD crossed positive all of which indicate trend strength. 3) The
prospects of a double bottom pattern forming in 3Q21 remain a possibility although
unconfirmed at this point. Resistance in the 1150s (about 1156) will have to break to call
it a double bottom with further upside in 2H21. A decline to a new YTD low required to
imitate a bearish outlook.
Exhibit 24: BBDXY - Daily Chart
Impulsive rally breaks above some moving averages, sideways range remains, could be double bottom with 2H21 upside. 1150s resistance, 1110s support.


Trade Recommendations G10
Michalis Rousakis
MLI (UK)
[email protected]
Exhibit 25: Open trades G10

Current G10 FX trade recommendations. Prices as of 17-June-2021.
Trade Description Open Date Entry Price Time Horizon Current Price Rationale Risks
Sell GBP/JPY calendar 04-Jun-21 Initial gain of 9-mth 154.366 Current cross-JPY uptrends face A rise in volatility as the structure
spread via long 1m ATMF 1.9982% (spot tactical near-term resistance, but has negative vega
GBP/JPY put and short ref: 155.636) FDI and portfolio investment
9m GBP/JPY put remain unsupportive for JPY over
medium-term
Buy 3m 1x2 EUR/CHF 19-May-21 0.38% EUR 3-mth 1.09234 EUR/CHF lagging broader moves An adverse turn in global risk
call spread with strikes (spot ref: 1.10) in its traditional anchors and most sentiment and renewed fall in Bund
1.10/1.12 importantly German bund yields yields
Buy 3m 1.28 USD/CAD 19-Apr-21 0.555% USD 3-mth 1.2326 Bullish USD/CAD seasonals, low An unexpectedly hawkish BoC, a
call option (spot ref: 1.2545) implied vol, hedge against risk off further surge higher in commodity
prices, an unexpectedly weak
broader USD, and additional
increase in global risk appetite
Buy 6mth 1x2 USD/SEK 09-Mar-2021 Initial gain of 6-mth 8.5267 US outperformance; higher A strong Fed pushback against the
call spread with strikes 0.0915% USD relative yields; hedge against risk- rise in US yields
8.65/8.90 (spot ref: 8.5215) off


Exhibit 26: G10 Closed trades
Recently closed trades in G10 FX
Trade Description Entry date Entry Level Target Stop Close date Level closed
0.6001% EUR (spot ref:
Buy 6m 1.17 EUR/USD put 27/04/21 0.5082% EUR (spot ref: 1.2083) 17/06/21
1.1931)
Sell CHF/JPY 13/04/21 118.514 114 122 28/05/21 122
2.6276% EUR 2.7308% EUR
Buy 3m EUR/USD straddle 05/03/21 25/05/21
(spot ref:1.1933) (spot ref: 1.2262)
Buy NOK/SEK 25/03/21 1.0020 1.04 0.98 20/05/21 1.0050
Sell NZD/USD 28/04/21 0.72 0.70 0.7350 13/05/21 0.7138
Sell CHF/NOK 11/03/21 9.05 8.00 9.45 29/04/21 8.98
Buy 1m 1x2 GBP/USD call spread with
30/03/21 0.64% GBP (spot ref: 1.3715) 19/04/21 1.17% GBP
strikes 1.3730/1.4100
Sell USD/JPY 25/03/21 109.13 106.70-106 110.80 15/04/21 108.66
Sell EUR/JPY via 124 put option 15/01/21 0.685% EUR (spot ref: 126) 15/04/21 Spot ref: 130
103 (Spot ref: USD/JPY
Sell USD vs. basket of JPY and SGD 100
22/11/20 95 103 30/03/21 109.85, USD/SGD
(equally weighted) (Spot ref: USD/JPY 103.86, USD/SGD 1.3442)
1.3485)
Initial gain of 1.2223% EUR (spot ref:
Buy 3m EUR/CHF butterfly 11/03/21 26/03/21 1.1544% EUR
1.10653)
Buy 3m ATM GBPNZD straddle at 7.859% vol
Buy 3m ATM GBPNZD straddle, Sell 3m
18/02/21 and sell 3m ATM NZDUSD straddle at 9.412% 26/03/21 0.5761% NZD
ATM NZDUSD straddle
vol
Buy USD/CHF via 0.97 6m call 22/11/20 0.16% USD (spot ref 0.9110 ) 26/03/21 0.1924% USD
Sell AUD/NOK 22/11/20 6.58030 6.10 6.80 24/03/21 6.53845
EUR/USD 1yr vol swap:
Buy 1yr EUR/USD vol swap vs. sell 1yr EUR/USD 1yr vol swap: 6.50% offer, 6.50% bid, USD/CNH
22/11/20 09/03/21
USD/CNH vol swap USD/CNH 1yr vol swap: 6.60% bid 1yr vol swap: 5.75%
offer
2.46% GBP (spot ref:
Buy 3m GBP/SEK ATMF call 23/02/21 1.54% GBP (spot ref: 11.6850) 08/03/21
11.8745)
Buy USD/CHF 6m forward outright 22/11/20 0.90606 04/03/21 0.92315
Sell EUR/USD via put with 1.15 strike 29/10/20 1.1708 29/12/20 1.2249
Sell CHF/NOK 22/11/20 9.89 9.00 10.50 18/12/20 9.6935
Buy a 1.34/1.37 USD/CAD call spread 15/10/20 1.3185 15/12/20 1.2701
Buy 3mth USD/NOK ATM straddle 22/11/20 4.4468%/4.8934% USD 07/12/20 5.3776% USD
Buy 1.1830/1.14 GBP/CHF put spread in
29/07/20 0.21% GBP (spot ref: 1.1870) 07/12/20 1.1830
1x2
Buy 3mth ATM USD put/JPY call 16/07/20 1.240% USD (spot ref: 106.93) 15/10/20 105.28
Buy 3mth 1.34/1.38 USD/CAD call spread 09/09/20 0.54% USD (spot ref: 1.3160) 29/09/20 1.3405
Sell NZD/JPY 21/09/20 70.50 66.00 72.60 25/09/20 70.25
Buy USD/SEK 08/09/20 8.8252 9.3000 8.6000 24/09/20 9.0000
Buy a 3mth AUD/JPY 68.5/66 ratio put
13/5/20 0.295% AUD (spot ref: 69.30) 13/08/20 76.607
spread
Buy NOK/SEK 21/05/20 0.9655 1.0300 0.9300 05/06/20 0.9700
Sell EUR/USD 21/05/20 1.0977 1.05 1.13 05/06/20 1.1300
Buy USD/CAD 25/03/20 1.4210 1.5250 1.40 27/05/20 1.3817
Buy 3mth 117/113 EUR/JPY put spread 16/03/20 1.18% EUR (spot ref: 118.5) 06/05/20 114.85
Buy NOK/SEK 20/03/20 0.9388 1.02 0.8400 31/03/20 0.9675
Buy GBP/USD 20/03/20 1.1770 1.25 1.1900 27/03/20 1.2480
Buy GBP/USD 20/03/20 1.1770 1.25 1.1400 27/03/20 1.2260
Buy 3mth 1.24/1.27 GBP/USD call spread 15/03/20 0.11%GBP (spot ref: 1.2380) 20/03/20 1.16
Buy EUR/SEK 09/03/20 10.59 10.90 10.65 12/03/20 10.90
Buy EUR/SEK 06/03/20 10.59 10.90 10.41 09/03/20 10.65
Buy a EURUSD 6M 1.13/1.17 call spread 20/01/20 0.8054% EUR (spot: 1.1098) 06/03/20 1.1336
Buy 1y EURUSD vol funded by selling
19/11/19 0.1% EUR 24/02/20 1.0882/10.5645
EURSEK vol
Buy AUD/JPY 04/11/19 74.75 80.00 02/03/20 71.50
Sell USD/NOK 06/02/20 9.22 9.00 9.32 18/02/90 9.32
Buy AUD/USD 13/01/20 0.6900 0.7600 0.6750 30/01/20 0.6750
Buy 3mth 1.32 USD/CAD call 08/01/20 0.42% USD (spot ref: 1.3026) 22/01/20 1.3147

EM Alpha Trade Recommendations
David Hauner, CFA >> Claudio Irigoyen
MLI (UK) BofAS
Claudio Piron
Exhibit 27: Open trades

Current Notiona
FX Entry date Entry level level Target Stop l Rationale/ Time horizon Risks
Long THB NEER 17-Jun-21 112.27 112.27 115 111 10 Daily vaccination rate in Thailand has picked up Slow implementation of mass
sharply which supports the case for faster vaccination program.
reopening of tourism.
Sell USD/COP vs pay 10y IBR, 3-Jun-21 100 3685 101.2 99.2 10 we think the exchange rate is reflecting a much The catalyst for the trade, a second
more negative outlook than the yield curve. high-yield downgrade by Fitch, may
beta-neutral not happen.
Buy MXN/CLP 17-May-21 36.24 35.92 38 35 10 In spite of the negative knee-jerk reaction of CLP, copper prices continue rising fast, or a
the move was more modest than we expected. In market unfriendly outcome of Mexico's
our view, the currency is not yet reflecting risk midterm election s
premium commensurate with the looming
political uncertainty.
Long CNH vs short SGD 3M 7-May-21 4.87 4.81 4.73 4.92 10 The EM Asia investment outlook is challenged by Singapore inflation and pre-emptive
rising US rates, commodity prices and a booming MAS FX policy tightening.
outright US economy. We overcome these challenges
through the lens of relative terms of trade effects
and EM Asia FX.
short 6m USD/KES 30-Apr-21 111 107.90 107 113 10 Tailwinds for trade: 1) IMF loan ($2.3bn) and upside inflation surprises, higher oil
Spot ref 107 prospective Eurobond issuance ($2-3bn for prices, prolonged COVID second wave
FY20/21), boosting FX reserves, 2) prospective and fiscal slippage into 2022 elections
upside from tourism and wider growth recovery.
Sell 2m USD/KZT NDF 14-Apr-21 436.5 427.67 420 445 10 Kazak macro has not deteriorated in last 2-3 deterioration in EM risk sentiment
Spot ref 431 months; cheap KZT valuations; lagging oil. Why
KZT vs RUB? KZT double carry & diversification;
KZT latest frontier addition to our FX carry
portfolio (GHS, EGP & UAH).
Short 6m USD/EGP 18-Mar-21 16.50 15.70 15.70 17.00 10 remain constructive on macro outlook with an Disorderly EM sell off
Spot ref 15.71 additional tailwind of tourism recovery
Sell USD/RUB 16-Mar-21 73 72.47 65 78 10 Long RUB remains our core reflation trade in the Escalating geopolitical tensions.
region. It enjoys the benefits of reflation but does
not suffer as much from the negative side-effects
from rising global rates
Long 6-month 15-delta 11-Mar-21 6.4981 6.43 6.285/6.90 - 10 Our thesis for CNY stability could be threatened as PBoC were to manage USD/CNY more
China's corporates increase their FX risk exposure, tightly
USD/CNY strangle leaving themselves more vulnerable to shocks
Mexico: 6m-9m USD/MXN call 20-Nov-20 0.72 0.72 1.5 0.3 5 Although we expect the MXN to perform in line MXN depreciating sharply in the first 6
with global risk factors for now, we believe that months, which would cause losses in
calendar spread the risks for the currency will increase ahead as we the short leg and invert the vol curve
approach the mid-term elections next year. further.
Buy 2M vs 6M IDR call calendar 20-Oct-20 - - 78 -200 - positioning for near-term upside risk around US Risk-on rally with USD weakness and
election, medium-term downside on vaccine sharp appreciation of high yield EM FX
spread deployment such as IDR
Source: BofA Global Research. Spot values as of Jun 17 2021. Bid/offer spreads accounted for in initiation and closing levels. Does not reflect tax withholdings or any investment advisory fees. Past performance is no
guarantee of future results. A complete performance record is available on request. Inception date – July 4, 2016 Initiation and closing prices are priced as of trade publication. For additional discussion of baseline
views, valuation and risks to open trades, please see links to detailed reports
Exhibit 28: Closed trades

Trade description Entry date Entry Level Target Stop Notional Close date Level closed
Long THB vs USD 15-Jun-21 31.17 30.2 31.5 10 17-Jun-21 31.3
Short 3m USD/UAH 18-Mar-21 27.95 27.00 28.60 10 14-Jun-21 26.98
Long USD/INR 2M 1x1.5 put spread 11-Mar-21 74.55 345 352 10 11-Jun-21 347
long 12M NDF vs 1M NDF PHP points 11-Mar-21 48.53 1500 850 10 11-Jun-21 48.52
Short EUR/HUF 17-May-21 353 345 352 10 04-Jun-21 347
Short EUR/PLN 9-Mar-21 4.60 4.45 4.55 10 04-Jun-21 4.46
Sell EUR/BRL 2-Feb-21 6.45 6 6.75 10 02-Jun-21 6.29
Buy USD/ZAR 4-Mar-21 14.51 13.75 16.55 10 27-May-21 13.73

Buy 1m 25d USD/CLP call option 12-May-21 59 180 0 10 17-May-21 85
short 3m USD/GHS 16-Feb-20 5.95 5.80 6.00 10 11-May-21 5.78
short ILS/CZK 3-Feb-20 6.51 6.30 6.65 10 11-May-21 6.46
Long TWD, short KRW3M 11-Mar-21 40.728 42.286 39.847 10 8-Apr-21 39.8
short USD vs. JPY & SGD 22-Nov-20 103.86 - - 10 9-Mar-21 109.85
short USD/CNH vol swap 22-Nov-20 -0.1 - - 10 9-Mar-21 0.75
short USDTWD 3m NDF outright 21-Jan-20 27.635 26.82 28 10 9-Mar-21 28
Sell ZAR/RUB 21-Jan-20 4.93 4.48 5.21 10 4-Mar-21 4.90
Short USD/KZT 3m NDF 24-Nov-20 434 (spot 425) 424 450 10 22-Feb-21 420
Short USD/GHS 3m NDF 24-Nov-20 6.05 (spot5.83) 5.85 6.15 10 16-Feb-21 5.85
MX: Short USD/MXN through 3m fwd 22-Nov-20 20.09 19.20 20.80 10 8-Feb-21 20.07
Short EUR/TRY 11-Jan-20 9.04 8.22 9.6 10 8-Feb-21 8.54
Sell ILS FX vs EUR/USD basket 14-Jan-21 3.52 3.66 3.45 10 3-Feb-21 3.64
Long BRL/CLP 5-Jan20 133.3 143 127 10 19-Jan-21 137.8
long TRY/ZAR 19-Nov20 2.03 2.41 1.82 10 11-Jan-21 2.08
Short EUR/PLN 22-Oct-20 4.59 4.40 4.50 10 22-Dec-20 4.51
Short EUR/CZK 21-Sep-20 26.97 26.0 26.7 10 22-Dec-20 26.32
Sell USD/RUB 8-Oct-20 77.63 72 77 10 14-Dec-20 72.9
3M USD put, CNH call fly 20-Oct-20 39 10 9-Dec-20 107
Brazil: 6m USD/BRL put spread 20-Nov-20 5.38 10 8-Dec-20 5.10
long USD/MXN 20-Oct-20 21.05 23 20.3 - 9-Nov-20 20.3
Buy USDKRW 1m 25delta risk reversal 20-Oct-20 -5 - - - 9-Nov-20 -56
Buy USD/ZAR 7-Sep-20 16.72 17.70 16.00 10 5-Nov-20 15.8
Sell USD/ILS 14-Sep-20 3.4420 3.35 3.52 10 21-Oct-20 3.38
Buying 1m USD put/INR call digita 24-Aug-20 73.28 71.25 - 10 14-Oct-20 73.27
Short PLN/HUF 3-Sep-20 80.9 81.02 78.5 82.5 25-Sep-20 79.65
Short USD/KRW 21-Jul-20 1198 1150 1170 10 25-Sep-20 1170
Long USD/RUB 17-Aug-20 72.9 77 70 10 23-Sep-20 77.1
Long USD/MXN 11-Jun-20 22.5 24.5 21.5 10 17-Sep-20 20.8
Sell USD/BRL 24-Aug-20 5.57 5.2 5.8 10 14-Sep-20 5.27
Buy USD/ZAR 11-Jun-20 16.96 18.20 16.2 10 11-Aug-20 17.6
Short USD/CZK 8-Jul-20 23.54 22.5 24.5 10 27-Jul-20 22.4
Short IDR NEER 5-Jun-20 100 94 104 10 25-Jun-20 9.60
Long 12M CNH points vs 2M 18-May-20 758 600 1915 10 19-Jun-20 1037
Long12M USD, short TWD NDF 18-May-20 29 -10 9.00 10 19-Jun-20 28.6
Long INR vs IDR via 3m NDF 18-May-20 196.8 205 191.5 - 12-Jun-20 191.5
Short USD/INR via 1m NDF 18-May-20 76.3 74 76 - 8-Jun-20 76
Long USD IDR calendar spread 21-Feb-20 56 200 0 10 21-May-20 -
short CNH via a 3M USD 27-Feb-20 7.0368 6.97 - 10 6-May-20 -
Short EURILS 6-Mar-20 3.79 3.7 4.1 10 28-Apr-20 3.91
long USDINR through calendar spreads 3-Mar-20 74.15 200 0/8 10 30-Mar-20 180
Buy 3m USD/SGD call spread 5-Feb-20 36 140 0 10 26-Mar-20 134
Sell USD/COP 20-Jan-19 3194 3050 3590 10 12-Mar-20 3600
Short EUR RUB 5-Mar-20 74.15 70.97 78 10 9-Mar-20 85.45
Sell USD/ZAR 27-Jan-20 14.56 14 15.55 10 6-Mar-20 15.72
Short ILS/CZK 9-Jan-20 6.56 6.45 6.85 10 5-Mar-20 6.55
Buy 6m-9m USD/MXN calendar spread 17-Jan-20 0.62 3 -0.5 10 3-Mar-20 1.01
Short IDR NEER 20-Feb-20 56 200 0 10 2-Mar-20 76.7
Buy USD/RUB 7-Oct-19 64.86 67.0 63.5 10 28-Feb-19 67.25
long 3M CNH/TWD 17-Jan-20 4.2979 4.25 4.30 10 27-Feb-19 4.2970
Long Ringgit through 2y MGS (July 21s) 20-Nov-19 4.1535 4.0 4.10 10 x 10 3-Feb-20 -3.5
Short PLN/HUF 20-Jan-19 79.25 76.5 80.55 10 30-Jan-20 78.6
USD/KZT 2m NDF 18-Dec-19 390 - - 10 8-Jan-20 381
Long equally-weighted basket of ZAR, BRL & MXN 18-Nov-19 100 107 95 10 6-Jan-20 103
Short 3m THB vs INR 18-Nov-19 2.40 2.26 2.48 10 6-Jan-20 2.40
Mex: sell USD/MXN 3m forward 19-Nov-19 19.51 18.8 19.9 10 6-Jan-20 18.8
Note: Bid/offer spreads accounted for in entry and closing levels. Does not reflect tax, withholdings or any investment advisory fees. Past performance is no guarantee of future results. A complete performance record
is available on request. Inception date – July 4, 2016. For additional discussion on baseline views, valuation and risks to closed trades, please see links to the relevant reports. Trade recommendations are highlighted
green when the closing value is greater than the entry value and red when the closing value is less than or equal to the entry value. Source: BofA Global Research

World At A Glance Projections
Exhibit 29: G10 FX Forecasts
Spot Jun-21 Sep-21 Dec-21
G3
EUR-USD 1.19 1.18 1.16 1.15
USD-JPY 110.59 107.00 110.00 113.00
EUR-JPY 132.09 126.00 128.00 130.00
Dollar Bloc
USD-CAD 1.23 1.23 1.25 1.25
AUD-USD 0.76 0.75 0.76 0.78
NZD-USD 0.70 0.71 0.72 0.74
Europe
EUR-GBP 0.86 0.88 0.88 0.88
GBP-USD 1.40 1.35 1.33 1.31
EUR-CHF 1.09 1.09 1.09 1.10
USD-CHF 0.91 0.92 0.94 0.96
EUR-SEK 10.19 9.90 10.10 10.30
USD-SEK 8.53 8.39 8.71 8.96
EUR-NOK 10.19 10.00 10.00 9.90
USD-NOK 8.53 8.47 8.62 8.61
Source: BofA Global Research, Bloomberg. Note: Forecasts as of 17-June-2021.
Exhibit 30: EM FX Forecasts

Spot Jun-21 Sep-21 Dec-21
Latin America
USD-BRL 5.06 5.20 5.20 5.20
USD-MXN 20.48 20.60 20.80 21.00
USD-CLP 733.59 710.00 710.00 710.00
USD-COP 3,678.23 3,700.00 3,600.00 3,550.00
USD-ARS 95.32 99.00 106.00 120.00
USD-PEN 3.91 3.60 3.55 3.50
Emerging Europe
EUR-PLN 4.54 4.50 4.40 4.30
EUR-HUF 354.48 359.00 361.00 363.00
EUR-CZK 25.52 25.50 25.25 25.00
USD-RUB 72.34 72.00 70.00 68.00
USD-ZAR 14.08 13.50 13.50 14.00
USD-TRY 8.63 8.50 8.75 9.00
EUR-RON 4.92 4.91 4.93 4.95
USD-ILS 3.26 3.30 3.25 3.20
Asian Bloc
USD-KRW 1,130.35 1,140.00 1,160.00 1,180.00
USD-TWD 27.76 27.60 27.24 26.89
USD-SGD 1.34 1.31 1.30 1.30
USD-THB 31.41 31.50 31.30 31.10
USD-HKD 7.76 7.75 7.76 7.77
USD-CNY 6.44 6.40 6.30 6.20
USD-IDR 14,355.00 14,100.00 14,000.00 14,000.00
USD-PHP 48.39 47.50 47.00 47.00
USD-MYR 4.14 4.05 4.00 3.95
USD-INR 74.08 72.00 71.50 71.00
Source: BofA Global Research, Bloomberg. Note: Forecasts as of 17-June-2021.

Options Risk Statement
Options and other related derivatives instruments are considered unsuitable for many
investors. Options strategy is by definition governed by a finite duration. The
most severe risks associated with general options trading are total loss of
capital invested and delivery/assignment risk, all which can occur in a short
period.
Analyst Certification
I, Claudio Piron, hereby certify that the views expressed in this research report
accurately reflect my personal views about the subject securities and issuers. I also
certify that no part of my compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or view expressed in this research report.

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Research Analysts
Europe
Athanasios Vamvakidis
FX Strategist
MLI (UK)
+44 20 7995 0790
athanasios.vamvakidis @bofa.co m
Kamal Sharma
FX Strategist
MLI (UK)
+44 20 7996 4855
[email protected]
Michalis Rousakis
FX Strategist
MLI (UK)
+44 20 7995 0336
[email protected] m
US
John Shin
FX Strategist
BofAS
+1 646 855 9342
[email protected]
Paul Ciana, CMT
Technical Strategist
BofAS
+1 646 855 6007
[email protected]
Vadim Iaralov
FX Strategist
BofAS
+1 646 855 8732
[email protected] m
Ben Randol
G10 FX & Rates Strategist
BofAS
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Pac Rim
Adarsh Sinha
FX Strategist
Merrill Lynch (Hong Kong)
+852 3508 7155
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Shusuke Yamada, CFA
FX/Rates Strategist
BofAS Japan
+81 3 6225 8515
Global Emerging Markets

Claudio Piron
Emerging Asia FI/FX Strategist
+65 6678 0401
[email protected]
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applying these ideas or strategies.

Fed To Eventually Remove The Punch Bowl: Global FX Weekly

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Latam Fund Manager Survey: Keeping the faith in BRL

Exhibit 1: Our medium-term views

Our key forecasts

What we particularly like right now

2 Global FX weekly | 18 June 2021

Central Bank calls

Global FX weekly | 18 June 2021 3

After the Fed pivot

EM FX - The Fed gets real

4 Global FX weekly | 18 June 2021

The spectrum of real rates in EM FX

Global FX weekly | 18 June 2021 5

• We see rising risks of sustained US inflation. As FX is mostly driven by central banks

Exhibit 6: Central bank hawkishness and FX performance in 2021

6 Global FX weekly | 18 June 2021

• Longer-term GBP anchors have not deteriorated, suggesting current decline is

Source: BofA Global Research, Bloomberg

Global FX weekly | 18 June 2021 7

Myria Kyriacou Kamal Sharma

Policy on hold, 2Q21 edition

Keep an eye on the balance of payments

Constructive on CHF front-end rates

No easy way out

8 Global FX weekly | 18 June 2021

We are all central bank watchers now

A challenge for the ages

One size does not fit all

Global FX weekly | 18 June 2021 9

A deep dive into reserve currencies

USD: The slow drift

Asia: Insatiable Reserve Accumulation

EUR: The ESG Angle?

Gold: The big gainer

AUD: The new diversifier?

10 Global FX weekly | 18 June 2021

Indonesia FX – Bullish risks from rising dollar surplus

We maintain a positive outlook on IDR based on improving terms of trade as prices of

Rising onshore dollar deposits

Global FX weekly | 18 June 2021 11

India FX – Strong fundamentals

12 Global FX weekly | 18 June 2021

Brazil optimism surge: Ibov >130k; BRL <5.10; GDP >4%

Inflation concerns and hawkish Central Bank in Brazil

Bullish sentiment could be peaking in Mexico

0% 10% 20% 30% 40%

Global FX weekly | 18 June 2021 13

Fed policy mistake Back to pre-pandemic levels in

Brazilian Real (BRL) Increase above 4%

US Dollar (USD) Increase between 2% and 3%

China/commodities Between 4.51 - 4.80

14 Global FX weekly | 18 June 2021

Converting Long THB vs USD into Long THB NEER

Global FX weekly | 18 June 2021 15

NEER Index Weights

16 Global FX weekly | 18 June 2021

USD trends have improved post-FOMC

Exhibit 21: USD breadth rose to +1 from -5 last week

USD/G10 MAA breadth Oversold Overbought