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EUR/USD: Trading the ISM Manufactuing Report

EUR/USD: Trading the ISM Manufactuing Report

2010-03-31 11:47:00
David Song;Michael Wright,
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Trading the News: U.S. ISM Manufacturing

What’s Expected

Time of release:        04/01/2010 14:00 GMT, 10:00 EST
Primary Pair Impact :    EURUSD
Expected:         57.0
Previous:         56.5

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

ttn03.30

February 2010 U.S. ISM Manufacturing

Manufacturing in the U.S. expanded at a slower pace in February as the ISM index slipped to 56.5 from 58.4 in January, which exceeded expectations for a decline to 57.9. The breakdown of the report showed the gauge for new orders slipped to 59.5 from 65.9 in January, with the new export orders weakening to 56.5 from 58.5, while the employment component increased to 56.1 from 53.3. As the effects of the fiscal stimulus begins to taper off, policy makers are likely to support the real economy in an effort to balance the risks for growth and inflation, and the Federal Reserve is widely expected to keep borrowing costs near zero throughout the first-half of the year as the central bank aims to bolster the economic recovery. ttnb03.30

January 2010 U.S. ISM Manufacturing

The ISM manufacturing index jumped to 58.4 in January from a downward revision of 54.9 to exceed forecasts for a rise to of 55.5, and marked the fastest pace of growth in five years. A deeper look at the report showed new orders increased for the third consecutive month, the employment gauge expanding to 53.3 from 50.2 in December, while the index for prices paid jumped to 70.0 from 61.5 in the previous month. Nevertheless, Federal Open Market Committee left the benchmark interest rate unchanged at the record-low of 0.25% in January in an effort to encourage a sustainable recovery, but noted “business spending on equipment and software appears to be picking up” as the expansion in monetary and fiscal policy continues to feed through the real economy. ttc03.30

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.

00001_EUR
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.

00002_EUR

How To Trade This Event Risk

Manufacturing in the U.S. is expected to expand at a faster pace in March as market participants forecast the ISM index to increase to 57.0 from 56.5 in the previous month, and the data is likely to encourage an improved outlook for the world’s largest economy as the recovery gathers momentum. However, the final 4Q GDP reading slipped to 5.6% amid expectations for a 5.9% expansion in the growth rate, with personal consumption increasing 1.6% versus forecasts for a 1.7% rise, and the ongoing weakness in the private sector may lead businesses to keep a lid on production and employment as policy makers maintain a cautious outlook for the region. On the other hand, a report by the Commerce Department showed retail sales unexpectedly increased 0.3% in February, with consumer credit advancing for the first time in a year, while personal spending advanced for the fifth consecutive month, led by a 0.9% rise in demands for nondurable goods. Moreover, orders for U.S. durable goods increased 0.5% during the same period after surging 3.9% in January, with chain-store sales rising 3.7%, and conditions are likely to improve going forward as the expansion on monetary and fiscal policy continues to feed through the real economy.

Nevertheless, the Fed’s Beige Book release earlier this month said economic conditions in nine of the twelve districts improved at a “modest” pace, while manufacturing “increased further,” but the central bank held a cautious outlook for the economy as labor demands remained “soft.” As a result, the Federal Open Market Committee kept the benchmark interest rate at the record-low in March and reiterated its pledge to hold borrowing costs “exceptionally low” for an “extended period” as the central bank aims “to promote economic recovery and price stability.” In addition, the central bank continued to express concerns about the deterioration in the labor market as “employers remain reluctant to add to payrolls,” and expects inflation to remain “subdued for some time” as Fed Chairman Bernanke expects to see a “nascent” recovery this year. Meanwhile, the MPC noted that the “Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis,” and the central bank is widely expected to normalize policy throughout the year as the outlook for growth and inflation improves. Moreover, Chicago Fed President Charles Evans said that the FOMC is likely to maintain an “accommodative” policy stance over “the next three or four meetings” in order to support the real economy, and the MPC may continue to support the real economy going into the second-half of the year as policy makers aim to encourage a sustainable recovery.

Trading the given even risk favors a bullish outlook for the greenback as market participants expect manufacturing activity to expand at a faster pace in March, and price action following the release could set the stage for a long dollar trade as growth prospects improve. Therefore, if the ISM index advances to 57.0 or higher from the previous month, we will need to see a red, five-minute candle following the report to generate a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance taking volatility into account, and this risk will establish our first mark. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to preserve our profits.

In contrast, the ongoing weakness in the private sector paired with fears of a protracted recovery may lead businesses to keep a lid on production, and an unexpected drop in the ISM survey could drag on the exchange rate as investors weigh the prospects for a sustainable recovery in the U.S. As a result, if the index slips to 55.0 or lower in March, we will favor a bearish outlook for the greenback, and will utilize the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

ttnd03.30

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