trading news reports

U.S. Manufacturing Expected to Hit Record Low, Will the Dollar Pull Back?

Friday, 14 November 2008 11:56:41 GMT  |  David Song, Currency Analyst

Growth prospects for the U.S. are expected to deteriorate further as the Empire Manufacturing survey is widely expected to reach a new record low in October. Economists project the index to fall to -26.8 from a record low reading of -24.6 in September as growth fears push firms to cutback on outputs.

Trading the News: U.S. Empire Manufacturing

What’s Expected

Time of release:                  11/17/2008 13:30 GMT, 08:30 EST

Primary Pair Impact :          EURUSD

Expected:                              -26.8

Previous:                               -24.6

Effect the U.S. Empire Manufacturing report had over EURUSD for the last 3 months

October 2008 U.S. Empire Manufacturing

The Empire manufacturing index slipped to its lowest level since recordkeeping began in 2001 as mounting fears of a global meltdown pushed firms to cutback on production. The survey fell to -24.6 from -7.4 in September as firms became fearful that the global economy may face a recession. The breakdown of the report showed that new orders plunged to -20.45 from 4.38 in the previous month, while the employment component fell for the fourth consecutive month in October. The data suggests that firms are aggressively cutting back on employment and production as growth prospects for the domestic economy turns bleak, and may lower production even further over the coming months as exports demands falter.

 

September 2008 U.S. Empire Manufacturing

Manufacturing activity in New York weakened in September as the Empire index unexpected slipped to -7.4 from 2.8 in August despite an increase in orders. A deeper look into the report showed that new orders rose to 4.38 from -2.20, while shipments increased to 0.64 from -0.86. Increased turmoil in the financial market paired with a slowdown in consumer spending led firms to lower their growth forecasts, and conditions may only get worse as employment opportunities remain weak. In addition, fears of a worldwide recession have emerged as the credit crunch spills into the global economy, and may lead firms to cutback on production as demands from aboard begin to waver. The lack of stability in the financial sector has led policymakers all over the globe to increase their efforts in order to stave off a severe downturn in their economy, and may lead the FOMC to ease policy further as growth fears intensify.

August 2008 U.S. Empire Manufacturing

The Empire manufacturing survey unexpectedly increased to 2.8 from -4.9 in July as lower input costs led firms to increase their growth forecast. Increased demands from abroad paired with falling commodity prices have certainly helped firms to deal with the slowdown in the domestic economy, but conditions may only get worse over the coming months as growth prospects for the world’s largest economy deteriorate. Rising unemployment paired with the ongoing downturn in the housing and credit sector could drag on private-sector consumption over the coming months, which would only heighten the downside risks to growth for the U.S. Moreover, as growth outlook turns increasingly dim, the Fed may look to lower borrowing costs further in order to avoid a severe downturn in the economy.

How To Trade This Event Risk

 

Growth prospects for the U.S. are expected to deteriorate further as the Empire Manufacturing survey is widely expected to reach a new record low in October. Economists project the index to fall to -26.8 from a record low reading of -24.6 in September as growth fears push firms to cutback on outputs. Industrial production in the U.S. declined 2.8% in September to record its biggest monthly decline since 1974, and economic activity may weaken further over the coming months as the economy heads into a recession. The ISM report showed that manufacturing contracted at its fastest pace in 26 years as the index plunged to 38.9 from 43.5 in September. A deeper look into the report showed that new orders decline to 32.2 from 38.8, while new export orders plunged to 41.0 from 52.0. Fading demands from home and abroad suggests that conditions may only get worse as fears of a global recession intensify, and firms may continue to cutback on employment in order to lower costs. Claims for unemployment benefits rose 516K to 3.9M in the week ending November 1^st to reach its highest level in 25 years. In addition, the economy lost another 240K jobs in October, following a 284K drop in the prior month, which pushed the unemployment rate to a 14 year high. The data suggests that employment opportunities will become increasingly scarce over the coming months, and economic activity may remain subdued well into the next year as the downturn in the economy accelerates. Meanwhile, the dour outlook for the economy has raised speculation that policymakers will increase their efforts to avoid a deep and severe recession as Fed Fund Futures are showing a 100% chance that the FOMC will lower the benchmark interest rate once again in December. Mounting expectations for a rate reduction by the Fed may lead the U.S. dollar to pare gains as a result, but as the flight to safety continues, the greenback may continue to benefit from its safe haven status.

 

Trading the given event risk may not be as clear cut as some of our other trades, but an unexpected rebound in manufacturing from its record low could improve growth forecasts for the U.S., and would certainly favor a bullish dollar trade. As a result, an improvement in the Empire survey will set the stage of a short EURUSD trade, and we will look for a red, five-minute candle following the release to trigger an entry on two lots of the euro-dollar. We will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first half of the trade reaches its target.

 

On the other hand, fears of a global meltdown paired with deteriorating fundamentals suggests that firms will look to cut production even further as demands falter, and a record low reading could stoke increased selling pressures for the greenback. Therefore, a dismal manufacturing release will certainly favor a long EURUSD trade, and we will follow the same strategy as the short trade mentioned above, just in reverse.

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