Exercise Caution Regarding Potential Weakness of the US Dollar – UBS

The US dollar experienced an uptick last week, but UBS has urged caution for those anticipating a swift reversal of its recent strength, highlighting only selective opportunities at this time.

Analysts at UBS indicated that their expectation that traditional G10 news linked to developments in the US labor market would overshadow unconventional factors—such as geopolitical issues, fluctuations in oil prices, and stimulus news from China—was validated, largely due to surprising positive employment data in September.

However, UBS pointed out that these movements align with the dynamics of interest rate differentials. Therefore, quickly seeking a reversal towards a weaker dollar may not yield favorable outcomes, as the dollar is not particularly expensive based on that analysis.

Furthermore, with US elections approaching, the results remain uncertain. The potential for a “Red Sweep” scenario is still plausible, which UBS views as bullish for the dollar. This increases the likelihood that the period leading up to the elections will consist of more short-term tactical trading rather than the initiation of persistent trends, unless polls start indicating a clear frontrunner.

Investors willing to look beyond the election-related fluctuations and commit to the notion that relative cycles may drive the dollar lower in the long term will find much more attractive entry points compared to the start of the month.

Consequently, UBS recommends taking a long position on a December 2024 expiry AUD/USD call option at 0.6850, with a reverse knockout at 0.7100. This approach presents a cost-effective method to maintain one of their core views during what is expected to be a period of potentially volatile price movements.

UBS’s favorable outlook on the Australian dollar has been bolstered by a rebound in commodity prices, driven by China’s stimulus efforts, which have shifted speculative positioning to a long position on the AUD.

As of 04:55 ET, AUD/USD was trading 0.3% lower at 0.6727.