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Bank of America: buy dollar and sell yen
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Loading...Bank of America Merrill Lynch (BAML) is tipping 5-year real rates to rise in the United States and says buying the dollar at the expense of the yen is the best trade to make a profit.
During the same time stocks and commodities have continued to perform well. But BAML says this divergence won't last. Instead, the investment bank sees higher global rates returning and that in turn will be dollar supportive.
The low level of five year real rates across G-4 countries is not consistent with tighter policy from both the U.S. and China
The bank expects U.S. real rates should rise back to levels seen at the end of 2016 within months and whether break even rates go up or down, history tells us the yen should fall.
"If U.S. real rates rise, long USD/JPY offers the best risk-reward irrespective of the direction of break evens/reflation trades," the note said.
BAML noted that concern about President Donald Trump's protectionist policies could result in "trade friction" which in turn puts a stronger dollar theory at risk, but argues the spicy rhetoric is cooling and that China is willing to work with Trump's team.
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