If FX Is The Messenger, The Message Is Not Clear - BofA Merrill

The FX market is confusing this year. More easing by the BoJ, the RBNZ, the Riksbank, the ECB and the Norges Bank, led to stronger currencies, despite delivering more than markets had expected in all cases.

The market seems to be taking recent monetary policy easing as evidence that central banks are reaching their limits, as their forward guidance has sent mixed signals.

We disagree in the case of the ECB, but are more sympathetic in the cases of the BoJ and the Scandies.

A surprisingly dovish Fedl last week added to the confusion, by ignoring the latest improvement in US data and better global market conditions. The market moves would be consistent with EM central bank interventions, as the time zone analysis in our quant section would suggest.

However, we do not believe that this is sustainable. In our view, the more counterintuitive the market moves, the sharper the correction during the inevitable reality check.

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