UBS has recently advised investors to consider selling 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 sees the possibility of a 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. Currently, market positioning data suggests that short positions against the dollar are concentrated in the Euro (EUR) and British Pound (GBP), making these currencies potentially vulnerable in the near future.
Despite the negative outlook on the GBP in the short term, UBS considers it a buy on dips due to a more favorable domestic rate environment and historical patterns of sterling’s strong recovery in the late October to early November timeframe. On the other hand, Japanese Yen (JPY) positioning is relatively neutral, indicating a potential unwinding of short-term yen-funded carry trades. The yen’s resurgence in correlation with equities makes it one of the top-performing currencies in the G10 realm.
The Swiss Franc (CHF) has shown strong performance, with little intervention from the Swiss National Bank (SNB), which is expected to continue supporting the currency as residual franc shorts are covered. UBS has set a target for EURCHF at 0.93, indicating a bearish outlook on the Euro against the Swiss Franc in the near future.
UBS’s cross-border mergers and acquisitions tracker suggests a negative deal balance for the Euro, Australian Dollar, and Swedish Krona but a positive balance for the GBP and JPY. In Australia, the tracker notes a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, reaching a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. Strong demand for Australian fixed income is offsetting a widening current account deficit, with stable goods export volumes but worsening trade balance due to falling commodity prices and rising import volumes.
Despite these challenges, UBS remains positive on the Australian Dollar (AUD), noting that the currency did not appreciate significantly during the post-Covid commodity price surge. The increase in imports may reflect strong domestic demand, supporting UBS’s constructive outlook on the AUD moving forward.
UBS’s analysis provides valuable insights into the current market trends, highlighting potential trading opportunities and risks for investors. It is important for traders to carefully consider these recommendations and conduct their own research before making any decisions in the Forex market.