UBS has published a report on the current currency situation, maintaining its key views on the G10 currency and predicting further strengthening of the US dollar. The company stressed that although markets are reducing the scope for divergence in pricing policy, there is no compelling reason to change its outlook.

Equities and risky assets continue to perform well amid low and failing near-term implied volatility, suggesting the dollar should maintain its position over time with continued yield support.

The firm observed that the dollar appears to be below policy rates, particularly after a significant reversal of the post-CPI yield rally, while the DXY index reversed less than 50% of last week’s sell-off.

UBS noted that recent comments from Federal Reserve speakers did not indicate a change in policy based on the April inflation print, which could mean that the Federal Open Market Committee (FOMC) may not cut rates in September as the market currently expects.

UBS also discussed the profitability of the carry trade as a way to diversify from pure USD exposure, recommending avoiding shorting the pair outright even if it is within what UBS considers a “sell zone.” Instead, the company focuses on Swiss franc (CHF) crosses such as and .

UBS predicts that the market has not fully priced in two further interest rate cuts by the Swiss National Bank (SNB), which are expected by the end of 2024.

The broker commented on the yield of Japanese government bonds (JGB), which approached 1.00% for the first time since 2012. UBS remains skeptical of a significant hawkish move from the Bank of Japan (BOJ), maintaining a target of 160.00 for the rest of the year, with viewership falling to 152.00, presenting a buying opportunity.

Finally, UBS discussed the April Canadian CPI report, which supports the view of a potential Bank of Canada (BoC) rate cut in June – a view that is not fully reflected in the interest rate market. The company maintains its bullish outlook, maintaining a vanilla call at 1.38.

UBS suggests that reduced CAD low positioning and lower implied volatility may enhance the attractiveness of expressing a dovish view of Canada via the FX market.

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