Euro has built a top at 1.48, UBS sees it lower

It appears that EURUSD has built a top around 1.48 against the dollar and entered a downward channel writes UBS analyst Thomas Flury in the latest edition of UBS Investors’ Guide. Shortterm support for the USD against the EUR is coming from different sources. European policy makers are becoming increasingly outspoken about the current EUR-strength. A highlight in this respect is the introduction of a Chinese-European working group to deal with the foreign exchange market situation. Another support for the USD against the EUR is coming from the changing risk perception within financial markets.

A rise in currency option prices is signaling an increasing demand for insurance against

adverse currency movements. It is very typical for the USD to rise in periods where

many investors have become risk-aware and are buying safe-haven assets. “For these

reasons we feel comfortable with our three-month forecast of 1.40,” notes UBS analyst Flury.

 

Dollar bottoms out against the franc

The Swiss franc reached a new high against the US dollar in November. The CHF has

benefited from growing risk aversion among investors, who are worrying about more bad news from the financial sector.

“We expect the greenback to recover soon and we forecast USDCHF will reach 1.17 in

three months. Nevertheless, in the very short term, USDCHF may hover in a range between 1.10 and 1.14 after reaching a new all-time low of 1.0890 on November 23,” writes Giovanni Staunovo in the latest edition of UBS Investors’ guide. The USD then staged a partial recovery as the CHF weakened a little after investor risk appetite revived somewhat and first tentative signs of the USD bottoming out emerged. These factors helped USDCHF to temporarily reach 1.13.

The yen has failed to gain further ground. The recent USDJPY move to 108 reflects

USD weakness rather than a strong JPY. “We believe USDJPY is bottoming out. This is

mostly due to expected weak macro data in the months ahead. Economic activity on the domestic side, especially for small firms, has deteriorated,” writes UBS analyst Dominic Schnider. Without solid domestic macro numbers, near-term rate hikes by the Bank

of Japan cannot be expected, yet these would be necessary for the JPY to appreciate sustainably. The recent compression of the yen’s yield disadvantage against the USD is expected to run out, bringing no further stimulus for a lower USDJPY. US interest rate futures are already pricing in rate cuts of about 75bp. This is rather aggressive, in our view, and leaves upside risks. USDJPY is expected to trade sideways with peak levels around 115. The next resistance levels, which mark our short term targets, are at 111.6 and at 113, concludes Schnider.