Selling USD is attractive, says UBS

UBS AG in their latest investment report say that they maintain their negative view of the outlook for USD over three and six months on the expectation that US growth is weakening

and the Fed will therefore not raise the key US interest rates any further. Recent developments in the USA have confirmed expectations in this regard. The majority of US economic data have reflected a weakening in growth. The Fed now also regards the slowdown in growth as a fact, and Fed Chairman Bernanke’s statements of late have been correspondingly cautious.

UBS believe that the trend of weaker US economic data will persist. UBS also anticipate that this will further dampen the market’s expectations with regard to rate hikes from the Fed. At present, the market is still expecting rates to rise on 8 August. As soon as this expectation turns around and US money market rates drop accordingly, the USD should lose value. We are therefore sticking to our USD-negative outlook and regard selling USD as attractive at the current level.

In the above scenario, UBS believe that the USD will lose ground against all the major currencies. From a trading perspective, however, we see selling USD against the EUR and the JPY as being the most attractive, as we see relatively little potential for disappointment with regard to the monetary policy of the ECB and the BoJ – unlike that of the BoE, for example. Moreover, the economic momentum in both these regions is positive. In the case of the JPY, another factor is the very cheap valuation, which we feel is overcompensating for the carry disadvantage vs. the USD. Our price targets are 1.28 for EURUSD and 110 for USDJPY, says UBS. As regards stop-loss levels, UBS recommend 1.244 or 1.224 for EURUSD depending on the risk budget. For USDJPY, the stop should be at 118.