UBS advised investors to sell any potential short-term gains in the US dollar and adopt a more bearish stance on the currency in the medium term. The bank expects a possible corrective recovery in September, especially if the Fed’s reluctance to implement more than 25 basis points of interest rate cuts is in line with the seasonal trend of the US dollar’s superiority during this month.
Current market data suggests that the short-term sell-off against the dollar is mainly concentrated in the euro and sterling, with both currencies likely to be vulnerable in the near term. However, UBS sees sterling as worth buying on dips, citing more supportive domestic interest rate expectations and historical patterns of strong sterling recovery from late October to early November.
In contrast, the Japanese yen is relatively neutral, indicating a decline in short-term yen-funded trades. The yen is also benefiting from the return of its inverse correlation with equities, which has elevated it to one of the best performing G10 currencies.
Furthermore, the Swiss franc has performed well and is expected to remain supported in the absence of any major intervention by the Swiss National Bank, with remaining short positions in the franc being covered. UBS has set a target of 0.93.
The firm’s updated cross-border M&A tracker reveals a deeply negative deal balance for the euro, Australian dollar and Swedish krona, but positive for the pound and Japanese yen. For Australia, the tracker points to a slowdown in the upward trend in the foreign direct investment balance, which reached a 12-month surplus of 2.1% of GDP in Q2, its highest level since pre-Covid. This is supported by strong demand for Australian fixed income, which helps offset a widening current account deficit.
UBS notes that Australian commodity export volumes have remained stable, suggesting that the deterioration in the trade balance is due to lower commodity export prices and higher import volumes. However, they believe the impact on the Australian dollar may be limited as the currency has not appreciated significantly during the post-Covid commodity price rally, and the increase in imports may reflect strong domestic demand, which is why UBS maintains a constructive view on the Australian dollar.
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