On the fence on what bias to take? Here are three reasons why you may wanna park yourself in the USD bull camp this summer!
Risk aversion could spur dollar rally
It seems that everywhere you look, there seems to be some type of trouble brewing.
Over in Asia, China has been experiencing problems as of late, as there are more and more signs that the economic giant is slowing down.
A quick look at this week’s manufacturing PMIs will show some rather discouraging results. The Chinese manufacturing PMI clocked in at 50.1, slightly off from the previous month’s 50.8 score. The HSBC version was even more pessimistic, as it dipped from 49.2 to 48.2, marking its lowest level since October last year.
Meanwhile, Portugal has recently popped back into the limelight, as its government is in disarray.
First, Finance Minister Gaspar resigned earlier this week. Next, Foreign Affairs minister Portas also tried stepping down from his post! This sparked rumors that Portas’ CDS-PP party may withdraw support for the ruling party and put the government in a major bind.
This has sent yields on Portuguese bonds flying higher, as 10-year yields rose by a whopping 1.4% on Wednesday, ending as high as 7.8%.
Worse, all the uncertainty and tension may have a spillover on neighboring countries like Spain and Italy, and cause their respective yields to jump as well. If this happens, we may see the dollar benefit from the wave of risk aversion, as market players shift their portfolios towards the dollar.
Fed is about to taper asset purchases
If you remember, Fed Reserve Chairman Ben Bernanke announced a couple of weeks ago that the Fed could soon start tapering off its asset purchases. Although Fed officials have made it clear to everyone that they won’t scale back on QE until they see that the economy is actually doing fine, data coming out of the U.S. seem to be helping them make the decision easier.
For instance, the ISM manufacturing PMI for June showed that manufacturing conditions improved and the sector expanded during the month. The most recent ADP non-farm employment change report also came in higher than its previous reading and topped forecasts when it showed that a net job gain of 188,000 for June.
Meanwhile, we saw a significant improvement in consumer confidence. The Conference Board consumer confidence index jumped from 74.3 in May to 81.4 in June.
I dunno about you, but it seems to me that these figures support the Fed’s stance to begin withdrawing stimulus measures soon!
USD pairs have broken through key levels
Last and certainly not the least, the dollar is kicking butt on the charts!
EUR/USD has dropped below 1.3000 while GBP/USD recently tested below 1.5200. Meanwhile, USD/CHF is testing the .9500 level.
With the dollar testing all these levels against its counterparts, it may only be a matter of time before the bulls muster enough strength to break through. If that happens, it may open the floodgates for more dollar bulls to load up on those long Greenback positions!
Of course, this doesn’t mean that you should bet the farm with a ton of long USD trades. Make sure you practice good risk management skills and do more reading of your own so you can have some convictions on your bets! Good luck trading this summer homies!