UBS analysts have recently advised investors to sell any potential short-term gains in the US dollar, signaling a more bearish outlook on the currency for the medium term. The firm’s recommendation comes amidst expectations of a possible corrective rebound in September, especially if the Federal Reserve’s cautious approach to implementing rate cuts greater than 25 basis points coincides with the seasonal trend of the US dollar typically performing well during this month.
A key highlight of UBS’s assessment is the current market positioning data, which reveals that the majority of fast money shorts against the dollar are concentrated in the Euro (EUR) and British Pound (GBP), making these currencies susceptible in the near future. However, UBS remains optimistic about the GBP, viewing it as a buy on dips due to a favorable domestic rates outlook and historical patterns suggesting a robust recovery in sterling from late October to early November.
Contrary to the positioning of the Euro and GBP, the Japanese Yen (JPY) is relatively neutral, indicating a potential unwinding of short-term yen-funded carry trades. The yen’s resurgence is also attributed to its inverse correlation with equities, propelling it to one of the top performers among G10 currencies. Meanwhile, the Swiss Franc (CHF) has shown resilience and is expected to remain well-supported unless significant intervention occurs from the Swiss National Bank (SNB) to cover residual franc shorts.
UBS’s updated cross-border mergers and acquisitions tracker sheds light on the deal balance across various currencies. The tracker reveals a negative tilt for the Euro, Australian Dollar, and Swedish Krona, while signaling positive momentum for the GBP and JPY. In the case of Australia, the tracker indicates a slowdown in the upward trajectory of the Foreign Direct Investment (FDI) balance, which had soared to a 12-month surplus of 2.1% of GDP in the second quarter, marking its highest level since pre-Covid times.
Despite challenges in Australia’s trade balance stemming from falling commodity export prices and rising import volumes, UBS remains upbeat about the Australian Dollar. The currency’s resilience during the post-Covid commodity price surge and its stable goods export volumes suggest a resilient outlook. Furthermore, strong demand for Australian fixed income assets is helping counterbalance the widening current account deficit, affirming UBS’s constructive stance on the AUD.