UBS advised investors to sell any potential near-term gains in the US dollar, adopting a more bearish stance on the currency in the medium term. The firm predicts a possible corrective bounce in September, especially if the Fed’s hesitancy to implement interest rate cuts of more than 25 basis points follows a seasonal trend of the US dollar outperforming this month.

Current market positioning data indicates that low swift money positions against the dollar are mainly in the euro (EUR) and the British pound (GBP), with both potentially vulnerable in the near term. However, UBS sees GBP as a buying opportunity on the downside, citing a more favourable outlook for domestic interest rates and historical patterns of a powerful recovery in sterling from overdue October to early November.

Meanwhile, the Japanese yen (JPY) is relatively neutral, suggesting an unwinding of short-term carry trades funded by the yen. The yen is also benefiting from a return to its inverse correlation with equities, which has catapulted it into the top-performing G10 currencies.

In addition, the Swiss franc (CHF) performed well and without significant intervention from the Swiss National Bank (SNB), it is expected to remain supported as the remaining low positions of the franc are covered. UBS has set a target of 0.93.

The company’s updated cross-border M&A tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD) and Swedish Krona (SEK), but positive for GBP and JPY. For Australia, the tracker indicates a moderately rising trend in the foreign direct investment (FDI) balance, which reached a 12-month surplus of 2.1% of GDP in Q2, the highest since before the COVID-19 pandemic. This is supported by powerful demand for Australian fixed income, which is helping to offset the widening current account deficit.

UBS notes that Australian goods export volumes have remained stable, suggesting that the deteriorating trade balance is being driven by falling commodity export prices and rising import volumes. However, they believe the impact on the AUD may be restricted as the currency has not appreciated significantly during the post-Covid commodity price surge, and the rise in imports may reflect powerful domestic demand, which is why UBS maintains a constructive stance on the AUD.

This article was generated with the assist of AI and reviewed by an editor. For more information, see our T&C.