Bank of America Merrill Lynch releases 2016 tips

1. Rates divergence across the Atlantic to continue
The investment bank has picked the rates divergence between the United States and Europe to continue in the year ahead, with long European rates against US rates now targeting 160bps. The figure currently stands at 113bps.

2. China to devalue the renminbi
BAML’s pick of 2016’s forex trades is the Renminbi, with expectations that China will devalue it. “We expect a 9% CNY devaluation in 2016 to 7.0, compared with a 3% depreciation implied by the forwards right now.”

3. Emerging markets stabilisation
The bank is also picking 2016 as the start of the recovery for emerging markets, with annual growth rising for the first time since 2010. This could be especially important in the context of a Chinese currency devaluation, it added.

4. Japan upside
Japan’s love affair with quantitative easing will go another round in January, BAML believes, and it’s more likely to have an equity impact than the currency market. The bank points out the Tokyo Price Index (TOPIX) has a higher weighting to domestic names against exporters.

5. Brexit risk
And finally, the risk of a British exit from the European Union could create some volatility in 2016, the bank believes. That coupled with the forex market will impact on domestic equity flows in the UK, it says, although FTSE’s exposure to commodities will make that index a good hedge for the aforementioned China risks.