Bearish Dollar Off European and Australian Expansion

Includes: FXA, FXE, UDN, UUP
by: The LFB

Fresh new data appeared on Friday trade that further indicates that the global economy is recovering. The German PMI showed that the service side of the economy expanded for the first time in a year, while the manufacturing side contracted at a very slow pace, suggesting that industrial side of the German economy may start to expand as well. Some raw estimates are that this would happen in September.

The most important aspect of Friday’s PMI report is the amount of optimism it denotes, since the index increased in August from the prior month at the strongest pace on record. The German PMI report follows similar economic releases from the European area, which suggest that the contraction phase might be over.

The flow of positive releases include Euro-area and Germany’s GDP reads that should the value of all goods and services in the economy grew at a faster rate than had been expected, the very strong ZEW numbers released earlier this week and the U.K. PMI numbers, which also showed that the service side of the economy expanded. Bearing in mind that over 70% of the U.K. economy is based on its huge service sector, the U.K. PMI numbers are very important news

All this taken together, is likely to have a very strong effect on the currency market going into next week. As the global economy recovers, investors start to look for higher yields, something that has a negative effect on the value of U.S. dollar, since money would flow out of the country.

Another aspect of this week's economic releases, as highlighted by TheLFB trade team, is that the global recovery would allow institutional investors to diverse their dollar holdings, something that initiated most financial problems during the credit crisis; illiquid dollar markets that hampered credit flows.

After all, who would like to receive a 0.25% yield from the U.S. (which is likely to stay low for a long period), when almost every other currency pays a higher rate than that offered by the Fed.

The Australian dollar yields 3%, and when added to oil and gold holding support, and the most robust outlook of any major central bank, creates the possibility that the aussie may soon get back into its bull run.

Disclosure: No Positions