Dollar back to square one after payrolls

Investing.com – The US dollar received a boost from a stronger-than-expected US Non-Farm Payrolls report on Friday, but UBS sees this as merely getting the greenback back to square one.

“Last Friday’s non-farm payroll surprise shifted US bond yields significantly higher, which translates into a rebound in the fair value estimated for the US dollar via our short-term models,” analysts at UBS said in an October 7 note.

“What is noteworthy is that spot price action has tracked the shift in the Fed, ECB and Bank of Japan’s relative forecasts fairly accurately over the past week: as a result there are no major disruptions to the model at the moment.”

The Swiss bank added that the only exception is, where the fair value at 1.3720 is more than 1.5 standard deviations above the immediate close on Friday.

The beta of the CAD/oil was very low, which is why the model reacts to a rise in US yields much more than a rebound in crude oil prices.

The dollar was the only currency to see a (marginal) rise in fair value against the US dollar last week, suggesting that in the absence of a negative move in stocks, the downside should remain somewhat limited.

Additionally, CFTC positioning data reported through last Tuesday suggests that leveraged funds were at fault for the payroll release early last week as they switched to net long the yen for the first time since February 2020. , UBS said.

Adding the fact that asset managers have been trading on the yen since August helps explain why the Japanese yen has performed poorly since the payroll data was released.

Another interesting development is that leveraged funds have converted net long Australian dollars for the first time since early July and by the largest amount since August 2023 likely in reaction to the Chinese stimulus news.

Asset managers are still selling the Australian dollar but the size of this position is less than 10% of the peak reached in 2024. Elsewhere, leveraged funds remain long sterling, short CAD and firm euros.