trading news reports

EUR/USD: Trading the U.S. ISM Manufacturing

Thursday, 28 May 2009 17:23:50 GMT  |  David Song, Currency Analyst

Manufacturing activity in the U.S. is expected to contract at a slower pace in May as economists forecast the ISM index to increase to 42.0 from 40.1 in the previous month, and the release could reinforce an enhanced outlook for future growth as economic activity improves.

Trading the News: U.S. ISM Manufacturing

What’s Expected
Time of release:        06/01/2009 14:00 GMT, 10:00 EST
Primary Pair Impact :    EURUSD
Expected:         42.0
Previous:         40.1

Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Mar 2009	05/01/2009  14:00 GMT	38.4	40.1	-9	+3
Mar 2009	04/01/2009  14:00 GMT	36.0	36.3	-20	-1

April 2009 U.S. ISM Manufacturing

The ISM manufacturing index increased to 40.1 from 36.3 in March, which is the highest reading since August, and exceeded expectations for a rise to 38.4. The breakdown of the report showed the gauge for new orders rose to 47.2 from 41.2 in March, with export demands rising to 44.0 from 39.0, while the employment component increased to 34.4 from 28.1. The data encourages an improved outlook for future growth and suggests that the world’s largest economy may have bottomed out in the first quarter as policymakers take unprecedented steps to stimulate the ailing economy. At the same time, the Federal Reserve lowered the growth forecast for this year and expects a slower recovery in 2010 as the nation faces its worst economic downturn in over half a century, and the central bank may expand its asset purchase program in an effort to soften the landing of the economy as the outlook for growth and inflation falter.

March 2009 U.S. ISM Manufacturing

Manufacturing in the U.S. fell at a slower pace in March as the ISM index increased to 36.3 from 35.8 in the previous month, and the data suggests the downturn in the economy may be reaching a bottom as policymakers take unprecedented steps to steer the region out of a  recession. A deeper look at the report showed new orders increased to 41.2 from 33.1 in February, while export demands rose to 39.0 from 37.5, and the employment component rebounded to 28.1 from a record-low of 26.1 in the previous month. Despite the minor improvement in March, economic activity is likely to remain subdued throughout the year as the labor market deteriorates while credit conditions remain far from normal, and conditions may get worse as the U.S. auto industry falters. Moreover, as the downturn in the world economy intensifies, trade conditions are likely to deteriorate further, which reinforces a weakening outlook for growth.

What To Look For Before The Release
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:

Bullish Scenario: 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.

Bearish Scenario: 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.

How To Trade This Event Risk

Manufacturing activity in the U.S. is expected to contract at a slower pace in May as economists forecast the ISM index to increase to 42.0 from 40.1 in the previous month, and the release could reinforce an enhanced outlook for future growth as economic activity improves. However, as the Federal Reserve lowers their growth forecast and expects a protracted downturn this year, economic activity is likely to remain subdued over the next two quarters as the nation faces its worst recession in over half a century. The preliminary 1Q GDP report showed the world’s largest economy fell at its fastest pace in five decades during the last two quarters as businesses reduced stockpiles of unsold goods at the fastest pace since recordkeeping began in 1947, while demands for U.S. exports plunged 28.7%% from the previous quarter to mark the biggest decline in 38 years. At the same time, factory orders fell 0.9% in March, while industrial outputs slumped for the sixth consecutive month in April, with the capacity utilization rate slipping to a record-low of 69.1% during the same period. Moreover, a report by the Commerce Department showed wholesale sales declined 2.4% in March to its lowest level since 2005, while retail spending unexpectedly slipped 0.4% in April. The data suggests businesses may continue to cut back on production and employment as they face fading demands from home and abroad, and the Federal Reserve may take further steps to soften the landing of the economy as growth prospects deteriorate. According to the Fed minutes for the April policy meeting, some members of the governing board argued that the central bank should increase its asset purchase program in the months ahead in order to ‘spur a more rapid pace of recovery’ as they project a slower upturn in 2010, and speculation for further easing could drag on the exchange as investors weigh the outlook for future policy. At the same time, ‘green shoots’ in the economy have spurs hopes that the worst of the recession has come to pass, and the rise in market sentiment may continue to drive the dollar lower as risk trends continue to dictate price action in the currency market.

Trading the given event risk favors a bullish outlook for the greenback, and price action following the release could set the stage for a bullish dollar trade. Therefore, if the ISM index rises to 42.0 or higher, we will look for a red, five-minute candle subsequent to the release to confirm a short 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, and this risk will determine our first target. Our second objective will be base on discretion, and in an effort to lock-in our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, fears of a deepening recession paired with the downturn in global trade may lead firms to hold a dour outlook for future growth, and a dismal ISM report should weigh on the exchange rate as economic activity falters. As a result, if the reading falls to 38.0 or lower, we will hold 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.


 

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