Investing.com – The US dollar got a boost last week, but UBS has warned caution for those looking for a quick reversal of recent strength, seeing only very selective opportunities at the moment.
“Our expectation last week that ‘conventional’ G10 news related to US labor market developments would overwhelm ‘unconventional’ factors such as geopolitics, oil price swings and stimulus news from China proved correct, albeit largely because US employment data in September for delivered a dramatic upside surprise. Analysts at UBS wrote this in a note dated October 9.
That said, the Swiss bank noted that the moves are completely in line with the interest rate differential dynamics, and that looking for a quick reversal in favor of a weaker USD may not be worth it as the USD on that basis is not particularly expensive.
Furthermore, markets are now within striking distance of the US election, and the outcomes remain too close to predict with any confidence.
Given that a Red Sweep remains a realistic possibility, and an outcome that the bank sees as clearly USD bullish, it is more likely that there will be more short-term tactical trading in the pre-election period rather than from the start of persistent trends – unless the polls show a clear winner.
But if investors are willing to cut through the election noise and commit to the idea that relative cycles will drive the dollar lower over the longer term, there are far more attractive entry levels available than at the start of this month.
“With this in mind, this week we recommend going long on a December 12, ’24 expiration 0.6850 call with an RKO [reverse knockout] at 0.7100, a cheap way to stick to one of our core views during what we expect to be a period of potentially choppy price action,” UBS said.
UBS’s positive AUD views have been boosted by the rebound in commodity prices due to Chinese stimulus, which appears to have shifted speculative positioning, ultimately tipping long AUD.
At 04:55 ET (08:55 GMT), AUD/USD was trading 0.3% lower at 0.6727.
