UBS, a leading financial firm, has recently recommended investors to sell any potential short-term gains in the US dollar. This advice comes amidst a more bearish stance on the currency for the medium term. UBS foresees a potential corrective rebound in September, especially if the Federal Reserve’s cautious approach to implementing rate cuts aligns with the seasonal trend of the US dollar typically outperforming during this month.
The market positioning data reveals that fast money shorts against the dollar are mainly concentrated in the Euro (EUR) and British Pound (GBP). As a result, both of these currencies are deemed vulnerable in the near term. Interestingly, UBS considers the GBP a buy on dips due to a more favorable domestic rates outlook and historical patterns indicating a robust recovery in sterling from late October to early November.
In contrast, the Japanese Yen (JPY) positioning appears relatively neutral, pointing towards the unwinding of short-term yen-funded carry trades. The Yen’s ascent is also attributed to its renewed inverse correlation with equities, making it one of the top performers among the G10 currencies. Similarly, the Swiss Franc (CHF) has exhibited strong performance and is expected to remain supported unless intervened by the Swiss National Bank (SNB), as residual franc shorts are covered. UBS has set a target for EURCHF at 0.93.
UBS’s updated cross-border mergers and acquisitions tracker indicates a negative deal balance for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK). On the contrary, it showcases a positive balance for the GBP and JPY. Notably, Australia’s tracker highlights a moderation in the increasing trend of the Foreign Direct Investment (FDI) balance, which has recorded a 12-month surplus of 2.1% of GDP in the second quarter – the highest since pre-Covid times. This is supported by robust demand for Australian fixed income, offsetting a widening current account deficit.
Despite stable Australian goods export volumes, the worsening trade balance is attributed to declining commodity export prices and heightened import volumes. Nevertheless, UBS remains optimistic about the Australian Dollar (AUD) due to its resilience during the post-Covid commodity price surge and rising import levels possibly indicating robust domestic demand. This positive assessment maintains a constructive outlook on the AUD.
UBS’s insights provide a comprehensive overview of the current market trends and potential vulnerabilities of major currencies, offering valuable guidance to investors seeking to navigate the volatile landscape of global finance.