UBS released a report on the current foreign exchange environment, maintaining its key views on the G10 currency and forecasting continued US dollar strength. The company stressed that although the markets are reducing the range of divergence in priced policies, there is no compelling reason to change its expectations.
Equities and risk assets continue to perform well with low and falling implied volatilities in the near term, suggesting that the dollar should hold its ground over time due to continued support for yields.
The firm noted that the dollar appears to be below front-end rates, especially after post-CPI yield movement largely eased, while the DXY reflected less than 50% of last week's sell-off.
UBS noted that recent comments from Fed spokespeople do not indicate a shift in policy based on April's inflation reading, which could mean the Federal Open Market Committee (FOMC) may not cut interest rates in September as currently expected by the market. .
UBS also discussed the viability of carry trades as a way to diversify away from US dollar exposure, and recommended avoiding selling the pair directly, even though it falls within what UBS considers a “sell zone.” Instead, the company focuses on Swiss Franc (CHF) pairs such as and.
UBS expects that the market has not fully priced in the two additional interest rate cuts by the Swiss National Bank (SNB) that they expect for the rest of 2024.
The broker commented on Japanese Government Bond (JGB) yields, which are close to the 1.00% level for the first time since 2012. UBS remains skeptical about a major hawkish move from the Bank of Japan (BOJ), maintaining a target of 160.00. By the end of the year we see dips towards 152.00 as a buying opportunity.
Finally, UBS discussed Canada's April CPI report, which supports the view of a potential interest rate cut by the Bank of Canada (BoC) in June – a view that has not yet been fully priced in by the rates market. The company is sticking to its bullish view, maintaining a vanilla call option at 1.38.
UBS notes that lower short positions on the Canadian dollar and lower implied volatility could increase the attractiveness of expressing pessimistic Canadian views via the FX market.
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