Investing.com – The US dollar received a boost last week, but UBS advised caution for those looking for a quick reversal of recent strength and only see highly selective opportunities at the moment.
“Our predictions last week that ‘traditional’ G10 news linked to US labor market developments would overshadow ‘non-traditional’ factors such as geopolitics, oil price fluctuations and Chinese stimulus news proved correct, albeit largely because September US employment data “September provided a dramatic upside surprise,” analysts at UBS said in a note dated October 9.
However, the Swiss bank noted that the moves are entirely in line with spread dynamics, so a quick search for a reversal in favor of a weaker US dollar may not be rewarding as the US dollar is not particularly expensive on this basis.
Additionally, markets are now within striking distance of the US election, and the results are still too close to be predicted with any confidence.
Given that a “red campaign” remains a realistic possibility, and an outcome that the Bank sees as clearly bullish for the US dollar, the odds are rising that the run-up to the election sees more short-term tactical trading rather than the start of sustained trends – unless the polls begin to indicate Clear winner.
However, if investors are willing to try to look past the election hype and stick to the idea that relative cycles will lead the dollar lower over the long term, there will be much more attractive entry levels available than at the beginning of this month.
“With this in mind, this week we recommend buying on 12 Dec 24 to expiry at 0.6850 with an RKO (reverse knockout) at 0.7100, which is an inexpensive way to hold one of our fundamental views for the duration of what we expect as a period of potentially… Price movement is volatile.
UBS’s positive views on the Australian dollar were reinforced by the rebound in commodity prices on the back of Chinese stimulus, which appears to have moved the indicator of speculative positions that have finally reversed the Australian dollar buying trend.
At 04:55 ET (08:55 GMT), the AUD/USD was trading 0.3% lower at 0.6727.