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USD Drops As US August ISM Manufacturing Contracts for a Third Month

USD Drops As US August ISM Manufacturing Contracts for a Third Month

Tzu-Wen Chen, Technical Strategist

THE TAKEAWAY: [U.S. manufacturing expectedly contracts in August for a third month] > [Global slowdown and domestic uncertainties restrain demand, and consumer and business spending] > [USDJPY bearish]

Manufacturing activity in the U.S. unexpectedly contracted in August for a third straight month to its lowest level since July 2009, as a slowdown in global economies and domestic uncertainties continue to weigh on demand. A report released by the Institute for Supply Management (ISM) showed that its manufacturing index declined to 49.6 in August from 49.8 registered in July. The median forecast of 81 economists surveyed by Bloomberg News had called for a breakeven reading of 50.0, which marks the dividing line between expansion and contraction.

On the other hand, the ISM prices paid index, an indicator of future inflation, unexpectedly jumped to 54.0 in August from 39.5 a month earlier. The print comes in significantly higher than consensus expectations for a reading of 46.0.

The decline in manufacturing activity was broad-based. The employment index fell to 51.6, the lowest since November 2009, while new orders dropped to 47.1, the lowest since April 2009, and order backlogs declined to 42.5. ISM Chairman Mark Holcomb expressed his concerns, noting that we may see a “little bit of erosion” in hiring and a possible cooling in auto manufacturing in the second half of 2012.

The manufacturing industry has largely stalled, as ongoing weakness in global economies, particularly in China and the euro-zone, continue to restrain demand for American exports and weaken business conditions. Furthermore, domestic concerns of the pending “fiscal cliff” is holding back consumer and business confidence and spending.

USDJPY 1-minute Chart: September 4, 2012

USD_Drops_As_US_August_ISM_Manufacturing_Contracts_for_a_Third_Month___body_Picture_2.png, USD Drops As US August ISM Manufacturing Contracts for a Third Month

Chart created using Market Scope – Prepared by Tzu-Wen Chen

The U.S. dollar dropped sharply against the Japanese yen in the minutes following the release of the ISM report. Ongoing weakness in the manufacturing sector, which has been a key component of the U.S. economic recovery, is likely to add to arguments for further monetary easing by the Federal Reserve. At the time this report was written, the USDJPY pair was trading lower at 79.32 yen.

--- Written by Tzu-Wen Chen, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.