UBS advised investors to sell any short-term gains in the US dollar and took a more bearish stance on the currency in the medium term. The company expects a possible corrective recovery in September, especially if the Federal Reserve’s reluctance to implement rate cuts of more than 25 basis points follows the seasonal trend of US dollar outperformance during this month.
Current market positioning data shows that the fast money shorts against the dollar are mainly in the euro (EUR) and the British pound (GBP), with both currencies potentially vulnerable in the short term. However, UBS sees the GBP as a buy on dips, citing a more supportive outlook for domestic rates and historical patterns of a strong recovery in sterling from late October to early November.
In contrast, the positioning of the Japanese yen (JPY) is relatively neutral, indicating that short-term yen-funded carry trades are expiring. The yen is also benefiting from the return of its inverse correlation with equities, elevating it to one of the top performers among G10 currencies.
In addition, the Swiss franc (CHF) has performed well and is expected to remain supported without significant intervention from the Swiss National Bank (SNB) as remaining short positions in the franc are covered. UBS has set a target of 0.93.
The company’s updated cross-border M&A tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD) and Swedish Krona (SEK), but positive for GBP and JPY. For Australia, the tracker signals a moderation in the upward trend in the foreign direct investment (FDI) balance, which reached an annual surplus of 2.1% of GDP in the second quarter, the highest since pre-historic times. the corona crisis. This is supported by strong demand for Australian fixed income, which is helping to offset a widening current account deficit.
UBS notes that Australian merchandise export volumes have remained stable, indicating that the deteriorating trade balance is due to falling commodity export prices and rising import volumes. However, they believe that the impact on the AUD may be limited as the currency has not appreciated significantly during the post-Covid-19 crisis in commodity prices, and the increase in imports may reflect strong domestic demand. Therefore, UBS maintains a constructive view on the AUD. .
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