The US dollar received a boost from the release of Friday’s stronger-than-expected nonfarm payrolls, but UBS sees this just moving the US currency back to square one.
“Last Friday’s NFP surprise shifted US front-end yields significantly higher which translates into a bounce in estimated USD fair value across our short-term models,” analysts at UBS said, in a note dated Oct. 7.
“What’s notable is that spot price action has tracked the shift in the relative Fed, ECB and BoJ expectations fairly accurately over the past week: as a result there are no significant model dislocations at the moment.”
The only exception is USD/CAD, the Swiss bank added, where fair value at 1.3720 is more than 1.5 standard deviations above Friday’s spot close.
The Canadian dollar’s beta to oil has been very low, which is why the model is reacting to higher US yields much more than a bounce in crude prices.
The Aussie dollar was the only currency that saw a (marginal) uptick in fair value against the USD last week which suggests that absent an adverse move in equities, the downside should remain somewhat limited.
Additionally, CFTC positioning data reported through last Tuesday suggest leveraged funds were wrong-footed by the payrolls release as early last week they turned net long yen for the first time since February 202, UBS said.
Adding the fact that asset managers had already been long yen since August helps explain why JPY has underperformed since the payrolls data.
Another interesting development is that leveraged funds have turned net long AUD for the first time since early July and by the largest amount since August 2023 presumably in reaction to news of China stimulus.
Asset managers remain short AUD but the size of that position is less than 10% of the 2024 peak. Elsewhere, leveraged funds remain long GBP, short CAD and flat EUR.
