UBS has advised investors to sell any potential short-term gains in the US dollar, taking a more bearish stance on the currency for the medium term. While acknowledging a possible corrective rebound in September, particularly due to the Federal Reserve’s cautious approach to rate cuts, UBS warns that the current market positioning data indicates vulnerability in the Euro and British Pound.
UBS views the British Pound as a buy on dips, citing a supportive domestic rates outlook and historical patterns of strength in late October to early November. In contrast, the Japanese Yen’s positioning is relatively neutral, indicating the unwinding of short-term yen-funded carry trades. The Yen’s inverse correlation with equities has positioned it as one of the top performers in the G10 currencies.
Outlook on Swiss Franc
The Swiss Franc has performed well, with UBS expecting it to remain supported as residual franc shorts are covered. Without significant intervention from the Swiss National Bank, the Franc is likely to maintain its strength in the market. UBS has set a target for EURCHF at 0.93, indicating a bearish outlook on this currency pair.
UBS’ latest tracker reveals a negative deal balance for the Euro, Australian Dollar, and Swedish Krona, but positive trends for the British Pound and Japanese Yen. For Australia, the tracker indicates a moderation in the rising trend of Foreign Direct Investment (FDI) balance, supported by strong demand for Australian fixed income. This has helped offset a widening current account deficit, with stable goods export volumes but falling commodity prices impacting the trade balance.
While the Australian Dollar faces challenges due to falling commodity prices and rising import volumes, UBS maintains a constructive outlook on the currency. The lack of significant appreciation post-Covid commodity price surge, combined with strong domestic demand, suggests limited downward pressure on the AUD in the near term.
UBS’ market outlook highlights the importance of monitoring currency positioning, market trends, and economic indicators to make informed investment decisions. While short-term fluctuations are expected, a careful analysis of medium-term trends can help mitigate risks and capitalize on opportunities in the foreign exchange market.