Forex
Further pressure on the US dollar is likely: UBS
Investing.com — The US dollar is expected to face increasing downward pressure in the coming months, despite a recent boost from stronger-than-anticipated economic data.
As per analysts at UBS, the outlook for the greenback remains bearish, driven by a combination of narrowing interest rate differentials, concerns about the growing US fiscal deficit, and shifting global monetary policies.
In light of these factors, UBS has downgraded the US dollar to “Least Preferred” in its global strategy, favoring currencies like the euro, British pound, and Australian dollar instead.
Thursday saw the US dollar gain some ground after the release of revised second-quarter GDP growth figures.
“Meanwhile, second-quarter GDP was revised upward to a 3.0% annualized growth rate from the previously reported 2.8%, driven mainly by stronger consumer spending,” the analysts said.
This revision was largely driven by stronger consumer spending, which also saw an upward adjustment to a 2.9% annualized rate from the initial 2.3%.
This positive data helped the US dollar recover slightly, but it remains under pressure. The has fallen by 3% over the past month and continues to hover near the lower end of its range since early 2023.
Despite this temporary reprieve, UBS analysts maintain that the broader outlook for the dollar is negative, with several factors likely to push it lower in the coming months.
One of the key factors expected to weigh on the US dollar is the anticipated narrowing of interest rate differentials.
The US Federal Reserve is likely to continue cutting interest rates, with UBS projecting a total reduction of 100 basis points across the Fed’s three remaining meetings in 2024.
While other central banks, including the Swiss National Bank, the Bank of England, and the European Central Bank, are also expected to reduce rates, their approach is likely to be more measured.
This slower pace of cuts abroad could make the dollar less attractive compared to other currencies.
In addition to the interest rate outlook, concerns over the US fiscal deficit are expected to further erode confidence in the dollar. The Congressional Budget Office has projected that interest costs on US debt will surpass defense spending this year, highlighting the growing fiscal challenges facing the country.
As the US presidential race intensifies, with Vice President Kamala Harris currently leading in the polls, the fiscal deficit is likely to become a focal point of debate, potentially creating additional headwinds for the dollar.
Global monetary policy shifts also pose a challenge for the US dollar. For example, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, which could add pressure on the dollar.
In contrast, the Swiss franc is expected to remain strong due to its safe-haven status and the Swiss National Bank’s anticipated conclusion of its easing cycle in September.
UBS forecasts that the euro, British pound, and Australian dollar will all strengthen against the US dollar by June 2025, with at 1.16, at 1.38, and at 0.70.
The anticipated weakening of the US dollar has significant implications for global markets. As the dollar depreciates, risk assets such as quality stocks are likely to become more attractive, particularly in an environment where the Federal Reserve is cutting rates.
UBS suggests that investors consider reallocating cash into high-quality bonds, especially those from investment-grade companies, to take advantage of the changing economic landscape.
Despite some signs of weakness in the US labor market, such as an uptick in unemployment in July, the overall picture remains resilient. Weekly jobless claims have declined, and consumer spending continues to show strength, alleviating fears of an immediate recession.
UBS maintains its base case for a soft landing for the US economy, supported by the expected rate cuts from the Fed.
UBS advised investors to sell any potential short-term gains in the US dollar, adopting a more bearish stance on the currency for the medium term. The firm anticipates a possible corrective rebound in September, particularly if the Federal Reserve’s hesitancy to implement rate cuts greater than 25 basis points aligns with the seasonal trend of the US dollar outperforming during this month.
The current market positioning data indicates that the fast money shorts against the dollar are predominantly in the Euro (EUR) and British Pound (GBP), with both currencies potentially vulnerable in the near term. However, UBS views the GBP as a buy on dips, citing a more supportive domestic rates outlook and historical patterns of a strong recovery in sterling from late October to early November.
In contrast, the Japanese Yen (JPY) positioning is relatively neutral, suggesting the unwinding of short-term yen-funded carry trades. The Yen is also gaining from the return of its inverse correlation with equities, which has elevated it to one of the top performers in the G10 currencies.
Moreover, the Swiss Franc (CHF) has performed well and, without significant intervention from the Swiss National Bank (SNB), is expected to remain supported as residual franc shorts are covered. UBS has set a target for at 0.93.
The firm’s updated cross-border mergers and acquisitions tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but positive for the GBP and JPY. For Australia, the tracker indicates a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, which has reached a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, which is helping to offset a widening current account deficit.
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, they believe the impact on the AUD may be limited as the currency did not significantly appreciate during the post-Covid commodity price surge, and the increase in imports may reflect strong domestic demand, which is why UBS maintains a constructive outlook on the AUD.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
BCA Research provided insights into the anticipated monetary policy actions by central banks in China and the United States. The research firm expects Chinese authorities to lower interest rates on existing mortgage loans, while the Federal Reserve is predicted to begin its monetary easing cycle.
According to BCA Research, a potential 100-basis-point cut in Chinese mortgage rates could save homeowners in China approximately RMB 300 billion ($44.7 billion) annually on interest payments.
Despite these potential savings, BCA Research suggests that the impact on China’s broader economy would be limited. The firm points out that subdued consumption is likely to persist due to factors such as weak labor market prospects, slower income growth, and household reluctance to take on new debt.
BCA Research also commented on the recent appreciation of the (RMB), deeming it unsustainable over the next six months. The firm believes that even with the Federal Reserve’s easing, the U.S. economy is not likely to be steered away from a recession. In this context, BCA Research views the U.S. dollar as a counter-cyclical currency that is expected to rebound.
Looking ahead, BCA Research anticipates that a U.S. recession could evolve into a global trade contraction by early 2025. The firm points to China’s economic vulnerability to such a downturn, which could negatively affect the value of the RMB.
Moreover, BCA Research forecasts that China will continue to experience disinflationary or deflationary pressures, necessitating the central bank to keep policy rates low. This environment of low interest rates coupled with modest growth is anticipated to restrain any significant appreciation of the Chinese yuan against the U.S. dollar.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com– Most Asian currencies gained ground on Wednesday as the dollar retreated in the wake of a fiery U.S. presidential debate, with focus turning to key upcoming inflation data due later in the day.
The Japanese yen was among the biggest beneficiaries of this trade, with increased safe haven demand after the debate putting the yen at its strongest level since early-January. The yen also benefited from somewhat hawkish-leaning comments from Bank of Japan officials.
Broader Asian currencies advanced on Wednesday, seeing some relief from a softer dollar. But regional markets were still nursing steep losses over the past week amid waning risk appetite.
Dollar dips after presidential debate; CPI awaited
The and both fell about 0.2% in Asian trade, with losses in the greenback coming in the wake of a fiery presidential debate between Kamala Harris and Donald Trump.
The debate furthered expectations for a hotly contested 2024 presidential race, which could present a major point of uncertainty for markets, given the contrasting views on policy pushed by both candidates. Harris and Trump both veered from the presented topics to engage in personal attacks against each other.
The dollar was also on the backfoot ahead of key inflation data due later in the day, which is widely expected to provide more cues on interest rates.
The reading comes just a week before a , where investors expect the central bank to cut rates by at least 25 basis points.
Japanese yen at 8-mth high on safe haven demand, BOJ hawkspeak
The yen was the best performer in Asia, with the pair falling 0.8% to 141.38 yen- its lowest level since early-January.
The currency benefited from some safe haven plays, as uncertainty over the U.S. election ramped up after Tuesday’s debate.
But a main point of support for the yen was hawkish comments from BOJ member Junko Nakagawa, who said that the central bank will continue to raise interest rates if inflation moves in line with its forecast.
Nakagawa’s comments come following a slew of hawkish signals from the BOJ, and were also made just a week before a BOJ meeting. Investors are uncertain over another rate hike by the central bank, following a 15 basis point raise in late-July.
Broader Asian currencies advanced, albeit slightly, as focus turned to the upcoming U.S. CPI reading.
The Chinese yuan’s pair fell 0.1%, but the yuan remained on the backfoot as U.S. policymakers proposed several more trade restrictions against Beijing.
The South Korean won’s pair fell 0.3%, while the Singapore dollar’s pair shed 0.2%.
The Indian rupee’s pair steadied near 84 rupees, while the Australian dollar’s pair was flat after sliding from over nine-month highs over the past week.
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