New drive on foreign exchange markets, says UBS

The USD is under pressure, and record hunting is making the rounds. In recent weeks, trading activity has resulted in several very interesting records for foreign exchange rates. It started with USDCAD dipping almost below 0.90 and GBPUSD reaching 2.1170. After that, both currencies came under pressure again and the race turned in favor of the EUR and the CHF, which posted record highs against the USD.

Analysts at UBS say that we can now even observe small but important steps on the pegged or quasi-pegged currencies. Recently the Saudi Arabian riyal reached its strongest level since the currency was pegged to the USD in 1987. Meanwhile, the Kuwaiti dinar, which was de-pegged in July this year, reached high levels last seen in 1989.

China’s renminbi and other Asian currencies have also experienced an accelerated appreciation. Hong Kong and United Arab Emirates among others managed to keep their exchange rates stable but in turn experienced a sharp drop in short-term interest rates, normally the response to large-scale investor demand for these currencies.

We are living through times of change where extremely stable relationships are questioned. Speculation has increased massively to the extent that currencies that are tied to the USD will have to appreciate against the Greenback. What do these new considerations mean for our USD forecast against the EUR, the yen, the British pound

or even the Swiss franc, ask UBS analysts in the latest edition of the UBS Investors Guide.

Over the past year, an obvious choice for investors in search of an alternative to the

USD has been the EUR and the GBP with their relatively large capital markets. Commodity-related currencies (AUD, NZD, CAD) or high yielders (BRL, ZAR, TRY and others) were also favorites. Investment pressure on these currencies was so strong that they are now extremely overvalued against all those currencies that were able to maintain a stable rate against the USD. Rising attractiveness of the USD-pegged currencies should therefore take pressure away from the EUR, GBP and others. Low-yielding currencies like the CHF or the JPY are special cases in this respect.

They were used to finance carry trades and are therefore even poised to appreciate in periods of rising uncertainty, as we now see happening. However, we expect the appreciation pressure to develop more strongly versus G10 currencies like EUR, GBP or CAD than versus the USD itself. UBS analysts continue to think that the USD is bottoming out versus the rest of the G10 currencies, especially as speculation over a revaluation of the pegged currencies is growing. Such a move would take investment pressure away from G10 currencies.