UBS’s recent advice to investors to sell any potential short-term gains in the US dollar reveals a growing bearish sentiment towards the currency. The firm’s analysis suggests that a corrective rebound may occur in September, especially if the Federal Reserve’s cautious approach to interest rate cuts persists. This trend aligns with historical data that shows the US dollar typically outperforms during this month. However, the current market positioning data indicates that fast money shorts against the dollar are primarily in the Euro and British Pound, making these currencies vulnerable in the near term.
While UBS views the British Pound as a buy on dips due to a more supportive domestic rates outlook, it remains cautious about the Euro and expects a negative impact on the EURCHF pair. The Japanese Yen, on the other hand, appears to be relatively neutral in terms of positioning, with the unwinding of short-term yen-funded carry trades contributing to its stability. The Yen’s inverse correlation with equities has also bolstered its performance, making it one of the top performers among G10 currencies. Similarly, the Swiss Franc has been performing well, supported by minimal intervention from the Swiss National Bank and the covering of residual franc shorts.
UBS’s analysis of cross-border mergers and acquisitions reveals a negative deal balance for the Euro, Australian Dollar, and Swedish Krona, but a positive balance for the British Pound and Japanese Yen. This suggests potential challenges for countries like Australia, where the tracker indicates a moderation in the rising trend of the Foreign Direct Investment balance. Despite strong demand for Australian fixed income, a widening current account deficit driven by falling commodity export prices and rising import volumes poses risks to the stability of the Australian Dollar.
Outlook on the Australian Dollar
UBS maintains a constructive outlook on the Australian Dollar despite the challenges posed by the current account deficit. The currency’s limited appreciation during the post-Covid commodity price surge and the increase in imports driven by strong domestic demand indicate resilience in the face of external pressures. The stability of Australian goods export volumes further supports UBS’s positive stance on the AUD, suggesting that the currency may weather the storm of changing trade dynamics.
UBS’s bearish stance on the US dollar and its analysis of specific currency positioning and cross-border trends provide valuable insights for investors navigating the current economic landscape. By carefully considering the implications of these assessments, market participants can make informed decisions to protect and grow their portfolios in an increasingly complex and uncertain environment.