Bank of America (BofA) has issued a warning about potential significant outflows from the U.S. dollar (USD) as month-end portfolio rebalancing approaches. This shift is primarily driven by strong equity performance in the U.S. and weaker bond returns globally.
What’s Happening?
In November, U.S. equities surged by 6%, outperforming European and Chinese markets, which saw declines of 3.2% and 5.7%, respectively. While U.S. bonds posted modest gains of 0.4%, bonds in Europe and Japan experienced declines. This disparity in performance has led global investors to rebalance their portfolios, potentially selling off USD assets to maintain currency balance.
Key Insights from BofA:
- USD at Risk: BofA suggests that this rebalancing will likely result in significant outflows from the USD into other currencies, particularly the euro (EUR) and emerging market (EM) currencies.
- Short-Term Trends: The bank recommends being cautious about the recent USD rally, citing factors such as lower U.S. yields and seasonal trends, including U.S. holidays.
- Swiss Franc Impact: There’s also an expected inflow into the Swiss franc (CHF). The Swiss National Bank (SNB)’s substantial equity holdings, especially in U.S. stocks, make the CHF sensitive to these month-end adjustments. Selling of USD/CHF is anticipated to be a dominant trend.
Long-Term Outlook:
While these rebalancing flows might put short-term pressure on the USD, BofA emphasizes that broader factors—like U.S. interest rates and central bank policies—will ultimately determine the dollar's long-term trajectory.
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