Manufacturing activity in the U.S. is expected to expand for the second consecutive month in September as economists forecast the ISM index to rise to 54.0 from 52.9 in August, and the data is likely to drive the dollar higher as policy makers see the nation emerging from the worst economic downturn since the post-war period.
[U][B]Trading the News: U.S. ISM Manufacturing[/B][/U]
[U][B]
What’s Expected[/B][/U]
Time of release: [B]1[/B][B]0[/B][B]/01/2009 14:00 GMT, 10:00 EST[/B]
Primary Pair Impact : [B] EURUSD[/B]
Expected: 54.0
Previous: 52.9
[U][B]Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months[/B][/U]
[U]August 2009 U.S. ISM Manufacturing[/U]
Manufacturing activity in the U.S. expanded for the first time in 19 months, with the ISM index rising to 52.9 in August from 48.9 in the previous month, and conditions are likely to improve throughout the second half of the year as the government takes unprecedented steps to steer the nation out of recession. A deeper look at the report showed the production component jumped to 61.9 from 57.9, which is the highest since October 2005, with the gauge for employment rising to 46.4 from 45.6, while export orders increased to 55.5 from 50.5. The data reinforces an enhanced outlook for future growth and businesses may ramp up their rate of production over the coming months as global trade conditions improve however, the Fed is likely to maintain a loose policy going into the following year as the board sees a risk for a slower recovery.
[U]July 2009 U.S. ISM Manufacturing[/U]
The ISM manufacturing index increased to an 11-month high of 48.9 in July amid expectations for a rise to 46.5, and the data encourages an improved outlook for future growth as firms scale back on production at a slower pace in the second half of the year. The breakdown of the report showed new export orders expanded in July, with the employment component rising to 45.6 from 40.7, while the index of new orders jumped to 55.3 from 49.2 in June. As growth prospects improve, investors anticipate the Federal Reserve to tighten policy over the next 12 months, and long-term expectations for higher interest rates may drive the dollar higher going into 2010 as policy makers anticipate economic activity to improve throughout the second half of the year. However, the FOMC make keep borrowing costs at the record-low for ‘sometime’ in order to foster a sustainable recovery, and the rise in risk appetite may weigh on the exchange rate as investors move into higher yielding assets.
[B]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]How To Trade This Event Risk [/B]
Manufacturing activity in the U.S. is expected to expand for the second consecutive month in September as economists forecast the ISM index to rise to 54.0 from 52.9 in August, and the data is likely to drive the dollar higher as policy makers see the nation emerging from the worst economic downturn since the post-war period. The final GDP reading showed economic activity contracted at an annual pace of 0.7% in the second quarter amid expectations for a 1.2% drop, with personal consumption falling at a slower pace than initially expected, and the expansion in monetary and fiscal policy should continue to support the ailing economy as growth prospects improve. A report by the Commerce Departmentshowed retail sales jumped 2.7% in August, with domestic vehicle sales rising to an annualized pace of 14.1M from 8.4M in July, while factory orders increased for the fourth month in July. At the same time, business inventories slumped for the eleventh month in July to mark the longest slump since 2002, while industrial outputs increased for the second consecutive month in August, and firms are likely to replenish their stockpiles over the coming months as domestic demands improve. However, the Fed’s Beige Book said household spending staying relatively “flat” during July and August as “credit standards remained tight” in most regions, while policy makers saw “modest improvements” in manufacturing and service-based activity as a result of the government stimulus, and the cautious outlook held by the central bank may lead businesses to maintain a lower level of outputs as global trade conditions remain weak. Moreover, Fed Chairman Ben Bernankesaid that “the recession is very likely over” during a speech earlier this month, but held a dovish tone as he expects unemployment to remain elevated as he sees a risk for a slower recovery. At the same time, President Barack Obama anticipates the economy “to start growing again” as financial conditions improve, but went onto say that the downturn in employment “could even get a little bit worse” in the coming months as prospects for a marked recover remains limited, while former Fed Chairman Alan Greenspan forecasts the economy to grow at an annual rate of 3-4% over the next six months and sees economic activity “flattening out” in 2010 as the government stimulus tapers off. As policy makers anticipate the jobless rate to push higher over the coming months and maintain a wary outlook for future demands, businesses may turn increasingly pessimistic towards the economy and keep a lid on production in an effort to weather the slump in trade.
Trading the given event risk favors a bullish outlook for the greenback as economists project manufacturing to expand for the second month in September, and price action following the release could set the stage for a long dollar trade as growth prospects improve. Therefore, if the ISM index rises to 54.0 or higher, we will look for a red, five-minute candle following the release to confirm 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 establish 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 preserve our profits.
On the other hand, the slump in global trade paired with fears of a slower recovery may lead firms to scale back their rate of production, and an unexpected fall in manufacturing is likely to drag on the exchange rate as investors weigh the outlook for future growth. As a result, if the index falls back to 48.0 or lower, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]