EUR/USD: Trading the ISM Manufacturing Report

Manufacturing activity in the U.S. is expected to contract at a slower pace in July, with economists forecasting the ISM index to increase to 46.5 from 44.8 in June, and the data is likely to encourage an improved outlook for the world’s largest economy as policymakers expect an economic recovery later this year.

[B][U]Trading the News: U.S. ISM Manufacturing

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[B][U]What’s Expected[/U][/B]

Time of release: [B]08/03/2009 14:00 GMT, 10:00 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]

Expected: 46.5

Previous: 44.8

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[B][U]Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months[/U][/B]

                                     [B]Period[/B]

                                   [B]Data Released[/B]

                                   [B]Estimate[/B]

                                   [B]Actual[/B]

                                   [B]Pips Change[/B]

         [B](1 Hour post event )[/B]

                                   [B]Pips Change[/B]

         [B](End of Day post event)[/B]

                                                     Jun 2009

                                   07/01/2009  14:00 GMT

                                   44.9

                                   [B]44.8[/B]

                                   -4

                                   +2

                                                     May 2009

                                   06/01/2009  14:00 GMT

                                   42.3

                                   [B]42.8[/B]

                                   -62

                                   -54

                         [U]

[/U][U]June 2009 U.S. ISM Manufacturing[/U][U][/U]

                                     Manufacturing in the U.S. contracted at a slower pace in June, with the ISM index advancing to a 10-month high of 44.8 from 42.8 in May, and economic conditions may improve throughout the second half of the year as a result of the expansion in monetary and fiscal policy. A deeper look at the report showed export orders increased to 49.5 from 48.0 in May, with the employment component jumping to 40.7 from 34.3, while the production index jumped to 52.5 from 46.0, which is the highest reading since January 2008. At the same time, the gauge for inventories slipped to 30.8 from 32.9 to mark the lowest reading since 1982, while new orders contracted from the previous month, and businesses may continue to scale back on production and employment they face fading demands from home and abroad.

                         [U]

May 2009 U.S. ISM Manufacturing[/U][U][/U]

                                     The ISM manufacturing index advanced to 42.8 in May from 40.1 in the previous month, and the data encourages an improved outlook for future growth as policymakers take unprecedented steps to stimulate the ailing economy. The breakdown of the report showed new orders expanded for the first time since the recession began in December 2007, with the gauge for foreign demands advancing to 48.0 from 44.0 however, the employment component tipped lower to 34.3 from 34.4 in April as businesses continued to embark on cost-cutting measures. As households continue to face a weakening labor market paired with fears of a protracted downturn, the rise in the savings rate foreshadows a weakening outlook for consumer spending, and the government may take further measures to stem the downside risks for growth and inflation in an effort to ensure a sustainable recovery.

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What To Look For Before The Release[/B]

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

                                      [B][U]Bullish Scenario:[/U][/B]

         [B][U][/U][/B]

         If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

                                   [B][U]Bearish   Scenario:[/U][/B]
         
         If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

[B]How to Trade This Event Risk[/B]

Manufacturing activity in the U.S. is expected to contract at a slower pace in July, with economists forecasting the ISM index to increase to 46.5 from 44.8 in June, and the data is likely to encourage an improved outlook for the world’s largest economy as policymakers expect an economic recovery later this year. However, the Fed’s Beige Book said manufacturing remained ‘subdued’ in June and July, while retail spending remained ‘sluggish,’ and firms may continue to scale back on production and employment over the coming months as they face fading demands from home and abroad. Reports by the district banks showed manufacturing expanded in Richmond for the third consecutive month in July, while production in the New York area fell at a slower pace during the same period but at the same time, outputs continued to tumble lower in Dallas and Philadelphia, and the data suggests economic activity may remain subdued throughout the third quarter as businesses continue to cut stockpiles of unsold goods. At the same time, a report by the Commerce Department showed orders for durable goods plunged 2.5% in June, with the personal savings rate surging to a 15-year high of 6.9% in May, and the slump in domestic demands may continue to stoke fears of a protracted downturn as private-sector consumption accounts for more than two-thirds of the economy. In addition, the International Council of Shopping Center reported chain-store sales slumped for the eleventh month in June as households faced a weakening labor market, and the bigger-than-expected drop in consumer confidence could translate into a slower recovery as banks continue to tighten lending standards for households and businesses. The advanced GDP report showed economic activity contracted an at annual pace of 1.0% in the second quarter, led by a 1.2% drop in personal consumption, and the outlook for domestic demands remain weak as the central bank anticipates the unemployment rate to reach an upper limit of 10% in 2010. However, as the FOMC raises its growth forecast and expects GDP to expand over the next two-years, expectations for a sustainable recovery may drive demands for the greenback as market participants project the central bank to tighten policy over the next 12 months. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, a drop in risk appetite could drive the EUR/USD lower as the reserve currency benefits from safe-haven flows.

Trading the given event risk favors a bullish outlook for the greenback as economic activity improves, and price action following the release could set the stage for a long dollar trade. Therefore, if the ISM index rises to 46.5 or higher in July, we will look for a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.

On the other hand, the downturn in domestic demands paired with fears of a protracted downturn may lead firms to turn increasingly pessimistic towards the economy, and a dismal ISM report could weigh on the exchange rate as the outlook for future growth remains dim. As a result, if the index unexpectedly falls to 42.0 or lower in July, we will favor a bearish forecast for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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