Bank of America/Merrill Lynch cogitates on fund managers
Bank of America/Merrill Lynch has published an FX specific companion piece to its Merrill Lynch fund manager survey.
In it, the bank says: “Optimism over the global growth outlook continues to build at a respectable pace, and asset allocations are shifting in a pro-risk direction. Our survey suggests investors are back to overweight equity/underweight bond positions.”
It adds: “Alongside historically significant overweight EM equity positions and a stretched EM FX position, this suggests that pressure on the USD related to a positioning adjustment to an early cycle environment has probably come to an end. The main risk to this view is that the overweight US equity/underweight euro-zone equity position is unwound as and when any global economic upswing is perceived to be broadening.”
The bank summarises the conditions for FX order flow as:
1) Limited scope for additional EM FX demand given near record long positions in both EM currency and underlying equities.
2) Euro selling as the deteriorating view on the euro zone in terms of regional preferences and adverse valuation could prompt increase in underweight euro zone equity position.
3) No material USD selling as rising regional preferences toward the US and lack of material USD overvaluation support the overweight US equity position.
4) JPY buying as underweight Japan equity reduced further and moderation of bearish views and reduction in valuation concerns lead to decrease in underweight JPY FX position.