UBS Advises Investors to Sell Short-Term Gains in US Dollar, Anticipates Bearish Medium-Term Outlook
UBS, a leading financial firm, has recommended that investors sell any potential short-term gains in the US dollar, as they adopt a more bearish stance on the currency for the medium term. The firm foresees a possible corrective rebound in September, especially if the Federal Reserve’s cautious approach to rate cuts aligns with the seasonal trend of the US dollar performing well during this month.
Market positioning data shows that fast money shorts against the dollar are mainly in the Euro (EUR) and British Pound (GBP), making both currencies susceptible in the near future. However, UBS sees the GBP as a buy on dips, pointing to a positive domestic rates outlook and historical patterns of sterling’s strong recovery from late October to early November.
On the other hand, Japanese Yen (JPY) positioning is relatively neutral, indicating a reduction in short-term yen-funded carry trades. The Yen is also benefitting from its inverse correlation with equities, making it one of the top performers among G10 currencies.
Additionally, the Swiss Franc (CHF) has been performing strongly and is expected to remain supported without significant intervention from the Swiss National Bank (SNB), as residual franc shorts are closed out. UBS has set a target for the CHF at 0.93.
UBS’s latest cross-border mergers and acquisitions tracker shows a negative deal balance for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but a positive balance for GBP and JPY. In Australia, the tracker indicates a slowdown in the increase of Foreign Direct Investment (FDI) balance, which reached a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, helping to offset a widening current account deficit.
UBS observes that Australian goods export volumes have remained steady, suggesting that the deteriorating trade balance is due to falling commodity export prices and increasing import volumes. Nevertheless, they believe the impact on the AUD may be limited, as the currency did not appreciate significantly during the post-Covid commodity price surge, and the rise in imports could reflect strong domestic demand. Therefore, UBS maintains a positive outlook on the AUD.
In summary, UBS’s analysis suggests potential opportunities and risks in the currency markets, providing valuable insights for investors looking to navigate the evolving financial landscape.