BoA/ML on the FX week ahead: “Signals are mixed for USD but clarity may be close”

BoA/ML on the FX week ahead: “Signals are mixed for USD but clarity may be close”

Bank of America / Merrill Lynch look ahead for week (& months) beginning 23 October 2017 – in summary:

Markets currently lack a unifying theme to connect the dots in G10 FX.

  • Signals are mixed for USD but clarity may be close
  • We remain constructive on USD and reprise our analysis on overseas profit repatriation which could be as much as 40% in FX

(ps. I posted on this here from Bank of America / Merrill Lynch… BoA/ML on what they expect on FX flows from overseas profit repatriation … and earlier I posted this from JPM: Estimated $2.2 tln for repatriation, but actual flow may be around $456 billion)
As markets look for overseas profit repatriations from US tax reform, we are watchful for a potentially sizable FX impact. We look to the limited external data to estimate that undistributed accumulated foreign earnings could be roughly 40% in FX. We also dig into our Risk Management Survey, where 50% of the respondents reported that their overseas cash was 0-20% in USD.
More:
Markets currently lack a unifying theme to connect the dots in G10 FX with politics and Fed Chair uncertainty dominating the near-term outlook.

  • Our own indicators are picking up conflicting signals for USD but next week's ECB rate decision may provide the first signpost for our currency narrative into year-end.
  • We continue to expect the USD to end firmer as the relative ECB/Fed policy stance and chances for US tax/repatriation underpin sentiment by end-Q4.

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