Title: UBS Prefers Selling the Upside in USD/CAD and EUR/NOK Amid Shifting Fundamentals
Original Reporting Credit: InvestingLive.com
Swiss banking giant UBS has recently indicated a preference toward selling rallies in both the USD/CAD and EUR/NOK currency pairs. In an evolving global macroeconomic landscape characterized by both volatility and central bank recalibration, UBS analysts have pointed to compelling reasons behind their strategies. Their approach aligns with evolving rate expectations, oil market dynamics, and Scandinavian central bank decisions. This article explores the context behind UBS’s positioning, offering a comprehensive breakdown of the rationale behind these trading preferences, alongside analysis from other market participants.
Overview of UBS’s Strategy
UBS has taken a selective approach to G10 FX positioning, with an emphasis on tactical opportunities in currency pairs where near-term fundamental forces suggest a retracement of recent gains. Specifically, UBS suggests taking advantage of upward moves in:
– USD/CAD (US Dollar vs. Canadian Dollar)
– EUR/NOK (Euro vs. Norwegian Krone)
The core idea is to use strong rallies in these currency pairs as opportunities to initiate short positions, leaning into expectations of broader macroeconomic normalization and commodity-driven strength in both the Canadian and Norwegian currencies.
Let’s take a deeper look at the individual rationales behind these views.
Selling USD/CAD Upside: Fundamentals Support CAD Strength
UBS favors short exposure to the USD/CAD pair on upward moves, based on several tailwinds for the Canadian dollar (CAD).
Key Drivers:
1. Oil Prices Resurgence
– The Canadian dollar has historically maintained a close correlation to crude oil prices given Canada’s status as a major net oil exporter.
– Oil prices have rebounded modestly in recent weeks due to production cuts and geopolitical tensions.
– UBS expects stabilizing oil prices to provide support for the loonie, especially if global demand remains steady.
2. Resilient Canadian Economy
– Canadian GDP growth has shown signs of resilience despite a global economic slowdown.
– While the Bank of Canada (BoC) has ended its rate hiking cycle, it remains relatively hawkish, helping narrow the rate differential between US and Canadian policy rates.
3. Strong Canadian Labor Market
– With unemployment rates near multi-year lows and persistent wage pressures, the Canadian economy continues to show strength on the employment front.
– These labor dynamics may bolster household consumption and keep the BoC cautious about initiating aggressive rate cuts.
4. US Dollar Valuation Headwinds
– UBS notes that the USD is trading somewhat rich across several valuation models.
– Any broad-based correction or weakening in the US dollar due to a shift in Federal Reserve guidance, softening US inflation, or a deteriorating macro backdrop could favor the Canadian dollar.
Technical Picture:
– The USD/CAD exchange rate has encountered resistance near the 1.3800 area, a level that could act as a cap in the near term.
– UBS believes traders should look to fade any strength toward that zone, with downside targets toward 1.3500 and potentially even 1.3300 if oil prices rise further.
Other Market Views:
– Analysts at RBC Capital Markets have also highlighted CAD resilience, stating that “commodity tailwinds and firm domestic indicators support a tactically stronger loonie.”
– Goldman Sachs expects the CAD to outperform as crude market balances tighten in the second half of the year.
Selling EUR/NOK Upside: Favorable Setup for the Norwegian Krone
UBS is also advocating a similar trade structure in the EUR/NOK pair, preferring to sell any rallies. The Norwegian krone (NOK) has been one of the more volatile G10 currencies but seems poised for strength in the near term.
Key Drivers:
1. Norges Bank’s Hawkish Tone
– Norway’s central bank, Norges Bank, has maintained a relatively firm policy stance compared to its European counterparts, even in the face of declining inflation.
– Norges Bank
Read more on USD/CAD trading.