Title: US Dollar Gets Boost from Strong Nonfarm Payrolls, UBS Analysts Predict Return to Square One
Investing.com - The US dollar saw a surge following the release of better-than-expected nonfarm payrolls, but UBS analysts believe this will only bring the US currency back to its starting point.
In a note dated Oct. 7, UBS analysts stated that the NFP surprise led to a significant increase in US front-end yields, resulting in a rise in estimated USD fair value across short-term models. The spot price action has been in line with the shift in Fed, ECB, and BoJ expectations, with no major model dislocations currently.
However, UBS noted that the Swiss franc is an exception, with fair value exceeding Friday's spot close by more than 1.5 standard deviations. The Canadian dollar's relationship with oil prices has been weak, causing the model to react more to higher US yields than to an increase in crude prices.
The yen was the only currency to see a slight increase in fair value against the USD last week, indicating that downside risks should be limited unless there is a negative move in equities. CFTC positioning data revealed that leveraged funds were caught off guard by the payrolls release, turning net long on the yen for the first time since February 202. This, combined with asset managers already being long on the yen since August, explains the underperformance of the JPY post-payrolls data.
Furthermore, leveraged funds have become net long on the Australian dollar for the first time since early July, reacting to news of China's stimulus. Asset managers, however, remain short on the AUD, with their position size less than 10% of the peak in 2024. Elsewhere, leveraged funds are long on GBP, short on CAD, and neutral on EUR.
Analysis: The US dollar received a temporary boost from strong nonfarm payrolls, but UBS analysts predict that it will soon return to its previous levels. The market reactions to the payrolls data have been largely in line with expectations, with some exceptions like the Swiss franc. Understanding these dynamics can help investors make informed decisions about their portfolios and take advantage of potential opportunities in the financial markets.