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Two key questions for FX markets - BAML

FXStreet (Barcelona) - Adarsh Sinha,FX Strategist at Bank of America Merrill Lynch explained that Real rates have been the battleground for supremacy among G4 currencies since the 2008 financial crisis as we have argued in past research. 2014 has been no different.

Key Quotes:

"Despite the conventional view that the latest bout of US dollar strength transpired in the absence of higher US rates, a quick glance at the Charts reveals this is plainly untrue in real rate terms. In fact, US 5yr real rates have been top of the G4 pack for over a month - the longest period since the financial crisis."

"As ever, market-based measures of real interest rates should be treated with caution, particularly where liquidity is thin (such as Japan). But, from a conceptual standpoint, we continue to believe these provide a useful guide to the influence of real yields on exchange rates, particularly against a backdrop of near-zero policy rates."

"There are two key questions for FX markets as we approach the end of 2014: (1) How much further US dollar appreciation to expect? (2) Does the weakness in high-beta/risky currencies foreshadow a bigger correction ahead? The real rates framework provides a partial guide, suggesting that while USD strength is sustainable, further appreciation may slow in the short term, and that if global growth/disinflation fears prove unfounded, the downside for risky currencies such as the AUD, NZD and Asian FX may be more limited in the short term."

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