Bank of America’s quantitative frameworks are indicating that the U.S. dollar is likely to extend its recent advance, supported by a mix of options market positioning, technical trend signals and cross-asset regime analysis, according to strategists at the bank.
The bank pointed to patterns in options flow and skew that have shifted toward bullish dollar exposure. In the strategists' assessment, option flows have generally favored USD calls, a development that aligns with technical measures that have produced bearish continuation signals for key dollar pairs.
"Our quant signals flag more USD strength ahead as it remains the relative safe haven of choice for a broad range of investors," BofA strategists said in a note.
Those technical indicators include signals for EUR/USD and AUD/USD that suggest continuing downside momentum for those pairs. In addition to single-market technicals, the bank’s cross-asset regime-switching (CARS) model is producing bearish signals for a number of currencies when equity and commodity factors are taken into account.
According to the strategists, equity and commodity drivers in the CARS model are exerting downward pressure particularly on the Japanese yen and the Australian dollar, reinforcing the dollar’s relative strength in the current environment.
Despite the weight of quantitative indicators favoring the dollar, the strategists cautioned that market behaviour is not uniform across regions. They highlighted that, since the start of the US-Iran conflict, the observed weakness in EUR/USD has predominantly occurred during non-US trading hours. By contrast, the euro has tended to appreciate during American session hours, suggesting differential positioning among U.S., Asian and European investors.
Beyond the directional view on the dollar, BofA’s models also single out the Canadian dollar as a noteworthy trade idea. The bank describes bullish CAD as its strongest signal, with both EUR/CAD and AUD/CAD flagged as vulnerable based on trend and event indicators.
The strategists further suggested that a bearish view on AUD/CAD could be attractive, noting previous crowding in long AUD positions and the relatively muted sell-off in that currency so far. They pointed to the pre-crisis concentration of long AUD exposure as a factor that may influence where near-term short-term value could emerge.
Overall, the bank’s quantitative insights combine option-market positioning, technical matrices and cross-asset regime analytics to form a coherent picture that currently favors the U.S. dollar, while also identifying CAD and certain AUD crosses as possible areas of downside.
Implications
- FX markets are the primary domain affected by these signals, with the dollar likely to attract safe-haven demand.
- Equity and commodity sectors are influencing currency moves, particularly for the yen and Australian dollar, per the CARS model.
- Cross-currency pairs involving the Canadian dollar may present trading opportunities given the bank's strongest bullish CAD signal.