UBS Bearish on US Dollar in Medium Term, Advises Selling Short-Term Gains
UBS, the renowned investment firm, has recently recommended investors to sell off any potential short-term gains in the US dollar, as they take a more bearish stance on the currency for the medium term. They foresee a possible corrective rebound in September, especially if the Federal Reserve decides to implement rate cuts of only 25 basis points, which typically aligns with the seasonal trend of the US dollar outperforming during this month.
Market positioning data indicates that most fast money shorts against the dollar are concentrated in the Euro (EUR) and British Pound (GBP), making these currencies vulnerable in the near future. However, UBS sees the GBP as a buy on dips, attributing this to a more supportive domestic rates outlook and historical trends of a strong recovery in sterling from late October to early November.
On the other hand, Japanese Yen (JPY) positioning remains relatively neutral, hinting at the unwinding of short-term yen-funded carry trades. The Yen is benefiting from its inverse correlation with equities, making it one of the top performers among G10 currencies.
Meanwhile, the Swiss Franc (CHF) has shown strong performance and is expected to remain supported without significant intervention from the Swiss National Bank (SNB). UBS has set a target for the currency at 0.93.
UBS's latest cross-border mergers and acquisitions tracker reveals a negative deal balance for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but a positive balance for the GBP and JPY. In Australia, the tracker indicates a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, reaching a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, offsetting a widening current account deficit.
UBS points out that Australian goods export volumes have remained stable, with the worsening trade balance attributed to falling commodity export prices and rising import volumes. However, they believe the impact on the AUD may be limited, as the currency did not appreciate significantly during the post-Covid commodity price surge. UBS maintains a constructive outlook on the AUD due to the increase in imports reflecting strong domestic demand.
In conclusion, UBS's insights provide valuable information for investors to make informed decisions in the forex market. By understanding the firm's analysis and recommendations, individuals can better navigate the currency landscape and potentially optimize their financial strategies for the future.