BoA/Merrill Lynch shares Forex strategies for H1 2016

Currency watchers deliberating on their Forex trading strategies for the months ahead may do well to take heed of new advice from the Bank of America (BoA)/Merrill Lynch.

Rather than focusing on the current turmoil in the market, take a moment to concentrate on the data and relative value of the G10 currencies. For newbies just starting to learn how to trade Forex, the G10 currencies comprise the ten most heavily traded currencies in the world: the US Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Swiss Franc (CHF), the Australian Dollar (AUD), the New Zealand Dollar (NZD), the Canadian Dollar (CAD), the Swedish Krona (SEK) and the Norwegian Krona (NOK).

Chart 7 below tracks data surprises in the G10 currencies. It’s immediately clear that Australia and Sweden stand out with the most positive data surprises. Meanwhile, Chart 8, tracking year to year inflation, clearly shows Norway and Canada as the most undervalued currencies.

What about the most overvalued currencies? Chart 9 below shows the USD and CHF leading the pack, while Table 1 – a heatmap of data, fundamentals and positioning in G10 Forex – supports buying NOK, CAD and SEK against CHF, USD and JPY.

In other words, should markets stabilise or risk appetites recover (the two often go together), it’s the risk-on currencies that will do well. Should oil prices steady, the CAD and NOK will almost certainly benefit while the AUD stands to benefit from a stabilisation in the Chinese economy.

The BoA/Merrill Lynch recommendations for the first half of 2016, however, show a clear preference for trading Forex on the basis of relative value within each currency group rather than risk-on vs. risk-off or trying to sooth-say the timing of changes in global risk appetite. It suggests buying dips in risk-off funding currencies such as the JPY and SEK and selling rallies in CHF and EUR.

Among the risk-on currencies, the recommendation is to trade long AUD against Asia EMFX and NZD.Sources: