Bank of America Merrill Lynch Research discusses the current volatile market conditions and notes that this week gave us further evidence that 2018 is not 2017, and that the sharp increase in market volatility this week is the adjustment from a low inflation to a normal inflation environment.
"Inflation does not have to be high. As long as it is not low, central banks are behind the curve and need to tighten. This is a wakeup call for markets. It is also a realization that central banks will not come to the rescue every time markets are in turmoil. This is the old normal, but markets need to get used to it again.
Still, we believe that inflation divergence will lead to more sustained FX trends in the months ahead...
This suggests to us upside risks for USD and GBP against EUR and CHF. The outlook is more complicated for JPY, given its sensitivity to market volatility, but our baseline is bearish for the months ahead," BofAML argues.