UBS Shifts to Bearish US Dollar Outlook
UBS, a key player in global financial services, has advised investors to consider selling any potential short-term gains in the US dollar (USD). This marks a shift to a more bearish stance on the currency for the medium term. UBS anticipates a possible corrective rebound in September, especially if the Federal Reserve remains hesitant to implement rate cuts greater than 25 basis points. Historically, the USD tends to outperform in September, aligning with this seasonal trend.
Market Positioning and Currency Insights
The current market positioning data shows a significant amount of "fast money" shorts against the dollar, particularly in the Euro (EUR) and British Pound (GBP). This suggests that these currencies could be vulnerable in the near term. However, UBS recommends buying GBP on dips, due to a supportive domestic rates outlook and historical patterns indicating a strong recovery in sterling from late October to early November.
Understanding Fast Money Shorts
Fast money shorts refer to short-term trading positions that bet against the value of a currency. For example, if traders expect the EUR or GBP to decline, they might short these currencies, hoping to buy them back at a lower price for a profit.
In contrast, the Japanese Yen (JPY) shows a more neutral positioning, indicating a reduction in short-term yen-funded carry trades. The Yen benefits from its inverse correlation with equities, making it a top performer among G10 currencies.
Swiss Franc Performance
The Swiss Franc (CHF) has also performed well. Without significant intervention from the Swiss National Bank (SNB), the CHF is expected to remain supported as residual franc shorts are covered. UBS has set a target for the CHF at 0.93.
Cross-Border Mergers and Acquisitions Insights
UBS's updated tracker for cross-border mergers and acquisitions shows a negative deal balance for the EUR, Australian Dollar (AUD), and Swedish Krona (SEK), but a positive balance for the GBP and JPY. In Australia, the tracker indicates 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. This is supported by robust demand for Australian fixed income, which helps offset a widening current account deficit.
Australian Market Dynamics
UBS notes that Australian goods export volumes have remained stable, suggesting that the worsening trade balance is due to falling commodity export prices and rising import volumes. However, the impact on the AUD may be limited, as the currency did not significantly appreciate during the post-Covid commodity price surge. The increase in imports might reflect strong domestic demand, which is why UBS maintains a constructive outlook on the AUD. This means they see potential for the AUD to strengthen or remain stable in the face of current economic conditions.