The Best Dollar To Buy
The consensus has shifted since US yields began to climb in May, and most investors we speak to now acknowledge the likelihood of further dollar strength ahead.
But market opinion is still divided on which is the best dollar to buy. We like three in particular: long USDJPY, long USDCHF, and short AUDUSD (in order of decreasing merit).
The Australian dollar has fallen sharply over the past three months on broadbased US dollar strength, worries over a slowdown in China, and fears over what will replace the mining investment boom in Australia.
We still see more currency weakness ahead, but selling AUDUSD is in third place on our list because China concerns have receded somewhat recently. Thursday’s strong China flash PMI has helped here (Chart 1) along with a reactivation of PBoC liquidity provision through reverse repos (Chart 2). Better trade numbers have also contributed to a sense that the worst may have past.
Positioning for USDCHF upside makes sense too given the pair’s traditional sensitivity to the US yield curve. However, Thursday’s much-improved Eurozone PMIs could limit upside in the very near term, so we relegate USDCHF to second place on our list of favourites. Policymakers are already reacting to the improving data flow with ECB Governing Council member Nowotny stating overnight that another ECB rate cut is no longer needed.
This leaves ‘long USDJPY’ holding the top spot on our list. The rising US yields story is supportive, especially with JGB yields safely under the spell of the Bank of Japan’s QQE program. Crucially too, USDJPY resumed its upward march overnight, taking Japanese stocks higher with it for a change. This causality reversal puts USDJPY back in charge of the yen-equities tango, and augers well for further yen weakness.
Read the full report: UBS