UBS has released a report on the current currency environment, maintaining its key G10 currency views and predicting continued strength for the US dollar. The company emphasized that while markets have reduced the size of priced-in policy differentials, there is no compelling reason to change their outlook.
Equities and risk assets are still performing well, with short-term implied volatility low and declining, suggesting the dollar will hold up over time thanks to continued interest rate support.
The firm noted that the dollar appears to be holding below opens, especially after most of the post-CPI interest rate movement recovered, while the DXY has reversed less than 50% of last week’s sell-off.
UBS noted that recent comments from Federal Reserve speakers did not indicate a shift in policy based on April inflation data, which could mean the Federal Open Market Committee (FOMC) would not cut rates in September, as currently expected by the market.
UBS also discussed the viability of carry trades as a way to diversify from pure USD exposure, and recommended avoiding shorting the pair directly, even if this is within what UBS considers a ‘sell zone’. Instead, the company focuses on crosses with Swiss francs (CHF), such as and .
UBS expects that the market has not yet fully priced in the two interest rate cuts from the Swiss National Bank (SNB) that they expect for the remainder of 2024.
The broker commented on the yield on Japanese government bonds (JGB), which has approached the 1.00% level for the first time since 2012. UBS remains skeptical of a significant aggressive move from the Bank of Japan (BOJ), keeping the 160.00 target. towards the end of the year and a drop towards 152.00 as a buying opportunity.
Finally, UBS discussed Canada’s April CPI report, which supports the view of a possible rate cut by the Bank of Canada (BoC) in June – a view that has not been fully priced in by the interest rate market. The company sticks to its bullish view and maintains a vanilla call option at 1.38.
UBS suggests that the reduced short position in CAD and lower implied volatility could increase the attractiveness of expressing dovish Canadian views through the FX market.
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