The low-volatility FX regime may be disrupted by event risk in autumn; preference for JPY and high-yielding emerging-market currencies
AI summary card
The low-volatility FX regime may be disrupted by event risk in autumn; preference for JPY and high-yielding emerging-market currencies
BofA has lowered its conviction in a near-term bullish USD view, maintains long JPY and bullish PEN positions, and believes EMFX carry trades are not yet overly crowded, although the risk of higher autumn volatility is partly priced through a steeper term structure.
- Closed the short EUR/USD recommendation after the July FOMC, without turning bullish on EUR/USD.
- Maintains long JPY versus CHF and CAD; whether USD/JPY breaks below 155 and whether it breaches 160 are key to assessing intervention credibility.
- The EMFX trend is the strongest since April, mainly driven by carry demand for high-yielding currencies in a low-volatility environment, with COP standing out.
- Recommends long PEN, supported by gold and copper prices, improved terms of trade, a wider current-account surplus, and upgraded Peruvian growth expectations.
- Is bearish on USD/CAD, as the report views lower US yields and quantitative and technical signals as favorable for CAD.
- Autumn Fed and BoJ decisions, elections, and fiscal events could lift FX volatility, although the three-month versus one-month implied-volatility curve is already steep.
Report interpretation
Overview
This report is a global FX weekly covering medium-term views on G10 and emerging-market currencies, near-term trade recommendations, and upcoming event risks. Its core view is that the low-volatility summer environment continues to support high-yielding emerging-market currencies, but monetary policy, elections, and fiscal issues could materially raise volatility and alter capital flows as autumn approaches.
Core views
In G10, BofA no longer recommends short EUR/USD but believes conditions are not yet in place to turn long; it maintains long JPY versus low-yielding currencies, although the credibility of official intervention has been impaired by USD/JPY's rebound. SEK has modest upside risk ahead of the Riksbank meeting and is supported over the medium term by Swedish growth, fiscal stimulus, and European external demand. In EM, the overall trend is bullish but driven by carry rather than broad-based fundamental improvement. The report particularly recommends long PEN, while noting that TRY's FX reserve constraint has eased but inflation constraints remain, and IDR is still awaiting further developments in export FX repatriation policy.
Analysis framework
The report combines yield differentials, implied-volatility term structures, trend and positioning signals, cross-border M&A flows, terms of trade, current accounts, central-bank policy, and political reform progress to formulate FX allocation views. It expresses certain strategy recommendations through trade targets, stop losses, and time horizons.
Methodology notes
Emerging-market FX volatility connectedness
The model measures the proportion of unpredictable volatility in an individual emerging-market currency explained by shocks from other currencies, helping assess market dispersion, carry-position crowding, and potential reversal risk.
FX valuation and event-risk pricing
By examining the relationship between EUR/USD and two-year yield differentials, as well as the slope between three-month and one-month implied volatility for G10 USD pairs, the report assesses FX responses to macro changes and whether autumn risks have been priced by the options market.
Transmission of commodity exports to currencies
Gold and copper prices, trade surpluses, current accounts, growth, and capital inflows are used to assess the medium-term appreciation basis for PEN.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- JPYBullish, mainly versus CHF and CAD
- Strengths
- Policy intervention expectations, potential BoJ hikes, and improved balance-of-payments trends.
- Weaknesses
- Quantitative signals, skew, flows, positioning, and trend have not yet confirmed further upside.
- Comparison
- More attractive relative to low-yielding CHF and CAD.
- Risks
- A renewed move above 160 in USD/JPY would further undermine the credibility of official intervention; policy participants may not share the same objectives.
- EUR/USDNeutral; short recommendation closed
- Strengths
- A constructive medium-term EUR preference remains in place.
- Weaknesses
- EUR/USD has struggled to sustain gains even after weak US data; European energy prices and Middle East uncertainty constrain EUR performance.
- Comparison
- FX performance has been more stable than levels implied by two-year yield differentials.
- Risks
- US employment and inflation data ahead of the September FOMC, Fed communication, and geopolitical developments.
- PENBullish; recommendation to short USD/PEN
- Strengths
- Higher gold and copper prices, record trade surpluses, improved current account, and growth and reform expectations supporting capital inflows.
- Weaknesses
- Currency performance is highly sensitive to metal prices and global risk appetite.
- Comparison
- Compared with other emerging-market currencies, it benefits from a stronger commodity-export base and an improving domestic political environment.
- Risks
- Peruvian central-bank intervention to limit PEN appreciation, lower metal prices, and rising global risk aversion.
- CADBearish USD/CAD, i.e., bullish CAD
- Strengths
- Lower US yields favor CAD; quantitative and technical signals support USD/CAD downside.
- Weaknesses
- High sensitivity to US growth, oil prices, and risk appetite.
- Comparison
- The report considers CAD one of the principal beneficiaries of lower US yields.
- Risks
- A rebound in US yields, deteriorating global risk appetite, or weaker commodity markets.
- SEKModestly bullish in the short term; constructive over the medium term
- Strengths
- Stronger Swedish growth, fiscal stimulus, external support from German fiscal policy and European defense spending, and relatively light market positioning.
- Weaknesses
- The market has already priced nearly three Riksbank hikes over the coming year, limiting additional monetary-policy support.
- Comparison
- Supported in the short term by hawkish Riksbank communication, though the overall stance for the remainder of the year remains neutral.
- Risks
- Falling energy prices and a lack of second-round effects in core inflation could cause the central bank to keep rates at 1.75% for longer.
Key data
- EMFX Volatility Connectedness72%The share of EMFX unpredictable volatility variance explained by shocks from other currencies; at the 58th percentile of the past 15 years, which the report believes does not yet indicate extreme complacency.
- Peru Current-Account Surplus3.5% of 2025 GDP; 5.7% of Q1 2026 GDPHigher gold and copper prices improve terms of trade and increase local USD supply.
- Peru GDP Growth Forecast3.5% in 2026; 4.4% in 2027The report expects pro-business reforms under the new government to support investment, domestic demand, and capital inflows.
- Riksbank Policy Rate ExpectationHold at 1.75% in August 2026; potentially raise by 25bp to 2.0% in SeptemberThe report expects the central bank to retain a hawkish bias, though the timing of hikes remains dependent on inflation and energy prices.
- Estimated CBRT Net FX PurchasesApproximately $33bn since JuneEasing reserve pressure may create room for policy normalization, but inflation near 32% and energy prices remain constraints.
- USD/PEN Trade TargetTarget 3.20, stop loss 3.50This corresponds to short USD/PEN, with a six-month time horizon specified by the report.
Impact & implications
If US yields continue to decline and risk appetite remains intact, CAD and high-yielding emerging-market currencies may benefit. However, low-volatility carry trades are vulnerable to drawdowns as autumn risk events increase. JPY direction depends not only on US data, but also on whether Japanese and US authorities can establish credible FX guidance through intervention, rates, or other policy actions. Commodity prices and the implementation of Peruvian reforms are key supports for PEN's relative strength.
Risks
- Key autumn central-bank decisions, including those by the Fed and BoJ, US midterm elections, German regional elections, and UK and Japanese fiscal events could trigger a sharp rise in FX volatility.
- Emerging-market currency gains are primarily carry-driven; positions could reverse quickly if global risk appetite weakens or volatility rises.
- Japan's FX policy involves multiple parties, including the Ministry of Finance, US Treasury, Japanese government, and BoJ, making policy intentions difficult to predict accurately.
- Middle East developments, energy prices, and European natural-gas prices may support the USD and weigh on the EUR.
- PEN faces risks from central-bank efforts to restrain appreciation, falling metal prices, and global risk aversion.
- Turkey's inflation and energy-price risks continue to constrain room for policy normalization.
What to watch
- Whether USD/JPY breaks above 160 or below 155, and whether Japanese and US authorities take follow-up action.
- US FOMC minutes, Jackson Hole speeches, PCE, nonfarm payrolls, and inflation data.
- Japanese GDP, CPI, and comments from BoJ officials.
- The Riksbank meeting and guidance on the likelihood of a September hike.
- The UK autumn budget, US midterm elections, and other autumn political and fiscal events.
- Gold and copper prices, Peru's trade balance, reform progress, and central-bank FX operations.
- EMFX volatility connectedness, carry-currency trends, and capital flows into high-yielding currencies.