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Table 1: Heatmap of inflation risks (green for high, red for low, in relative terms) Total Inflation gap since 2007 —Inflation Inflation change Core Corechange = Taylor spread ~— Housing prices Qutput gap Source: BofA Merrill Lynch Global Research. The results in Table 1 are supportive of the USD and the scandies against JPY, EUR and CHF. This is fully consistent with our projections for 2017, expecting USD strength to continue, particularly against JPY, and the scandies to do well against EUR and CHF. Based on this analysis, we recommend buying USD/JPY and selling CHF/SEK, to position for inflation risks in G10 economies. Long USD/JPY is also our top directional trade for 2017 and we already have a trade recommendation to sell EUR/SEK. Therefore, we would recommend selling CHF/SEK as a new trade to position for inflation risks. CHF/SEK is one of the most overvalued crosses in G10. It is currently at its highest value ever, with the exception of the level reached when the SNB removed the EUR/CHF floor. We also expect the SNB to intervene to offset FX pressure, while higher uncertainty increases risks of a rate cut. The risk to this view is if tail risk scenarios unfold in European politics, such as an early election in Italy with Five Star winning, or Le Pen wining the second round in the French elections. Although we expect markets to be more concerned about European politics following the US elections, we do not see tail risk scenarios in our baseline. Trade: We recommend selling CHF/SEK, from spot at 9.184, with a target of 8.4 and stop loss at 9.5. Change in structural fiscal Credit growth Unit labour cost Unemployment gap Bankof America “a Global Rates, FX & EM 2017 Year Ahead | 16 November 2016 17 Merrill Lynch HOUSE_OVERSIGHT_014747