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U.S. ISM Manufacturing Expect to Fall Further, Can the Dollar Hold Its Ground?

Mon, Nov 3 2008, 06:45 GMT
by Daily FX Research Team

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Manufacturing activity is anticipated to contract for the third consecutive month as economists forecast the ISM index to slip to 42.0 from 43.5 in September despite the decline in input prices. Falling commodity prices have helped to lower production costs for firms as the producer price index declined to 8.7% from 9.6% in August, but fading demands from the domestic as well as the global economy has clearly taken a toll on economy as manufacturing activity weakened considerable throughout the country.

Trading the News: U.S. ISM Manufacturing

What’s Expected

Time of release: 11/02/2008 15:00 GMT, 10:00 EST

Primary Pair Impact : EURUSD

Expected: 42.0

Previous: 43.5

Impact the ISM Manufacturing has had on EURUSD after the last 3 Quarters

September 2008 U.S. ISM Manufacturing

Manufacturing activity in the U.S. contracted for the second consecutive month in September to reach its lowest level since 2001. The ISM manufacturing index plunged to 43.5 from 49.9 in August, indicating that demands are slowing at a faster pace as fears of a global recession intensify. A breakdown of the report showed that new orders slipped to 38.8 from 48.3, while the employment component weakened to 41.8 from 49.7 in the previous month. The drastic downturn in the manufacturing sector indicates that the U.S. economy is clearly heading into a recession, and the Fed could be forced to act in order to stave off further downturns in the world’s largest economy. Despite the neutral policy stance taken on by the FOMC, mounting fears of a recession has spurred speculation that the MPC will look to lower the benchmark interest rate at their next meeting.

August 2008 U.S. ISM Manufacturing

The ISM manufacturing index contracted for the first time in three months, falling to 49.9 from 50.0 in July. The summary of the report showed that inventories of unsold goods surged to 49.3 from 45.0, while the employment component eased to 49.7 from 51.9. Fading demands from the domestic economy paired with higher input costs have certainly led producers to cutback on production and employment, and conditions may only get worse as rising inflation continues to sap purchasing power for consumers. Meanwhile, export orders increased to 57.0 from 54.0, which suggests that the weaker dollar has helped to boost foreign demands. However, as the effects of the fiscal stimulus plan wear off, manufacturing activity may fall further throughout the rest of the year as inflation remains well above the Fed target.

July 2008 U.S. ISM Manufacturing

Manufacturing in the U.S. inched lower to 50.0 from 50.2 in June as firms continue to face higher input costs amid slowing demands. The breakdown of the report showed that new orders plunged to a seven year low of 45.0 from 49.6, while export orders slipped to 54.0 from 58.5. Indeed, rising food and energy costs have lowered domestic and foreign demands as inflationary concerns accelerate across the globe, and conditions may only get worse as economic activity in the world’s largest economy continues to falter. The growth outlook for the U.S. has clearly weakened throughout the first half of the year, and may deteriorate further as the labor demands waver.

How To Trade This Event Risk

Manufacturing activity is anticipated to contract for the third consecutive month as economists forecast the ISM index to slip to 42.0 from 43.5 in September despite the decline in input prices. Falling commodity prices have helped to lower production costs for firms as the producer price index declined to 8.7% from 9.6% in August, but fading demands from the domestic as well as the global economy has clearly taken a toll on economy as manufacturing activity weakened considerable throughout the country. In October, the Philadelphia Fed index plunged to -37.5 from 3.8 in the previous month, while the Richmond Fed index slipped to -26 from -18. In addition, manufacturing activity in New York fell to its lowest level since recordkeeping began in 2001 as the Empire manufacturing survey dipped to -24.6 from -7.4 in September.
Meanwhile, just two weeks ago we saw that the retail sales index contracted for the third consecutive month as consumer spending fell 1.2% in September. Moreover, as the advance GDP reading for the third quarter showed that the world’s largest economy contracted 0.3% in the third quarter, increased fears of a sever downturn is likely to limit production over the coming months. As growth prospects turn increasingly dim, the Fed could be forced to ease policy further and may bring the benchmark interest rate below 1.00% for the first time in history, which could stoke increased selling pressures for the U.S. dollar in the near-term.

Despite the considerable slowdown in the economy, the greenback continues to benefit from its safe haven status, and a surprising improvement in manufacturing could stoke increased buying pressures for the reserve currency. As a result, if the data crosses the wires much higher than the 42.0 estimate, we will favor a long position for the U.S. dollar (short EURUSD). We will look for a red, five-minute candle following an improved reading to confirm an entry on two lots of EURUSD, and will place our initial stop at the nearby swing high (or reasonable distance). This initial risk will determine our first target, and our second target will be based purely on discretion. In order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches it target.

On the other hand, if the ISM release falls inline or below the projected estimate, we anticipate increased selling pressures to push the greenback lower against its major currency counterparts. Therefore, fall in manufacturing would favor a short U.S. dollar poistion (long EURUSD), and we will follow the same strategy for short trade as the long mentioned above, just in reverse.

Published on  Mon, Nov 3 2008, 06:11 GMT

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