Dollar Returns to Square One Following Payrolls – UBS

The US dollar experienced a boost following the release of stronger-than-expected nonfarm payrolls last Friday. However, UBS analysts believe this merely returns the currency to its previous standing.

According to UBS, the surprising NFP results led to a significant increase in US front-end yields, which has resulted in an uptick in the estimated fair value of the USD across their short-term models. They noted that spot price movements have closely mirrored the shifts in expectations from the Federal Reserve, European Central Bank, and Bank of Japan over the past week, indicating no significant model discrepancies currently.

The only notable exception is the USD/CAD pairing, where the fair value is assessed at 1.3720, which is over 1.5 standard deviations above Friday’s closing price. The Canadian dollar’s minimal sensitivity to oil prices means that the model is reacting more to rising US yields than to fluctuations in crude prices.

Meanwhile, the Australian dollar saw a slight increase in fair value against the USD last week, suggesting that, barring any negative equity movements, the downside potential remains somewhat constrained.

Additionally, data from the Commodity Futures Trading Commission (CFTC) through last Tuesday indicates that leveraged funds were caught off guard by the payrolls report. Earlier in the week, they had shifted to a net long position in yen for the first time since February. The fact that asset managers had already held long positions in yen since August further explains why the yen has underperformed following the payrolls announcement.

Another noteworthy trend is that leveraged funds have moved to a net long position in the Australian dollar for the first time since early July, with the largest increase since August 2023, likely in response to news of stimulus measures from China. While asset managers continue to hold short positions in AUD, the size of these positions is less than 10% of the peak seen in 2024. In other developments, leveraged funds are long on GBP, short on CAD, and flat on EUR.