Watch for potential weakness in the US dollar

Investing.com – The US dollar got a boost last week, but UBS advised caution against those looking for a quick reversal of recent strength, seeing only very selective opportunities for now.

“Our expectations last week that ‘conventional’ G10 news on US labor market developments would overwhelm ‘unconventional’ factors such as geopolitics, oil price swings and China stimulus news proved correct, though largely because the data September employment data from the US provided a dramatic positive surprise. ” analysts at UBS said in an Oct. 9 note.

That said, the Swiss bank noted that the moves are fully in line with rate differential dynamics, and that looking for a quick reversal in favor of a weaker USD may not be rewarding as the USD is not particularly expensive on this basis.

In addition, the markets are now within striking distance of the US election, and the results remain too close to be considered with any confidence.

With a “red sweep” remaining a realistic possibility and an outcome the bank clearly sees as bullish on the USD, the chances are growing that the run-up to the election will see more short-term tactical trading than the start of persistent trends – unless the polls start pointing to a clear winner.

However, if investors are prepared to try to get past the election noise and buy into the idea that relative cycles will drive the greenback lower over the longer term, much more attractive entry levels are available than earlier this month.

“With this in mind, this week we recommend a 0.6850 call with expiry on 12Dec24 with an RKO (reverse knockout) at 0.7100, a cheap way to hold one of our core views during what we anticipate as a period of potentially choppy price action,” UBS said.

UBS’s bullish views on the AUD were bolstered by rising commodity prices on China’s stimulus, which appears to have moved the needle on speculative positioning, which ultimately reversed the AUD.

At 04:55 ET (08:55 GMT), AUD/USD traded 0.3% lower at 0.6727.