BofA Look Into USD Overshooting Vs. Fundamentals

Bank of America write “in contrast to January, the DXY has diverged more meaningfully from its key drivers.”

• “Fed repricing has supported the USD but is offset by robust equities and some improvement in China sentiment.”
• “While carry is supportive, we caution against buying USD at current levels, especially vs. JPY, where there is risk of policy resistance.”
• “Divergence also implies upside risk to implied volatility.”
• “While broader risk sentiment matters for G10 FX, the relative performance of technology stocks is less important.”
• “A strong negative correlation between US rates and China sentiment is symptomatic of the PBoC's reaction function, which in turn can amplify the impact of eventual Fed easing on USD.”