Liquid Insight: M&A continues to support USD

Kamal Sharma - Miercoles, 25 de Marzo

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M&A matters In a note published last year, we analyzed the impact of cross-border M&A activity on currency markets. We concluded that the impact of M&A is a far more pervasive driver for FX via the FDI channel rather than via the announcement effect. The analysis was particularly relevant at the time against the backdrop of the emerging trend of policy and growth divergence.

These divergences have grown since then, as 2015 has become the year of the central bank policy surprise. For FX markets, such divergences have inevitably led to focus on the capital flow channel as a key driver for FX markets. As our Global Fund Manager Survey has highlighted in recent months, the investment community has traded this divergence consistently since the start of the year against the backdrop of US growth outperformance, and subsequently, ECB QE.

M&A in numbers 

2014 was the strongest year for global cross-border M&A since the financial crisis with the deal count approaching 2011 levels (Chart 1). This is only the second time since the turn of the millennium that global cross-border deal volume has surpassed the $1trn mark. The significance for FX markets is the extent to which these deals have been transacted on a cash basis. This is a reflection of the elevated cash levels held by corporates and the reluctance to use debt markets as a source of funding. 

On a trend basis, cross-border M&A has continued to improve into 2015, as our Chart of the Day: Global cross-border M&Ahighlights. Global monetary conditions should remain supportive for continued growth in M&A activity, as Chart 2 highlights. The BofAML global liquidity tracker remains broadly in positive territory as the significant ECB QE package announced in January should continue to underpin global liquidity conditions despite the prospect of the start of the Fed tightening cycle.  

See attached report for further information.

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