UBS - "The summer weakness of the dollar has extended further this month. The greenback ended the week around 1.33, 96, 1.55 and 0.92 against the euro, yen, pound and Swiss franc respectively. America's currency has been undermined by stronger data in the Eurozone, UK and China. But its current soft patch also reflects investors reducing positions and seasonally lower volumes in the currency markets. That suggests dollar weakness has been exaggerated. The Treasury market is also signaling greenback weakness may be overdone. Ten year US bond yields at 2.57% are below their recent highs of 2.75%. But they remain well above the 2.20% levels that prevailed in June when Chairman Bernanke signaled the Federal Reserve may start to taper asset purchases later this year.
Despite the currency markets' price action, US data is consistent with the Federal Open Market Committee announcing in September that it will begin to cut the pace of its bond buying. That risk was also highlighted by four Fed officials this week. Thus, we think investors should not give up on the dollar, particularly as we head towards next month's FOMC meeting.
This week's key points for currencies are:
- stronger US data likely in the week ahead
- cyclical data supporting euro for now
- sales tax debate keeping USDJPY capped
- sterling isn’t a buy
- Australian dollar shorts squeezed, outlook still bearish"