How To Trade This Event Risk
Manufacturing activity in the U.S. is expected to contract for the fourteenth consecutive month in March as businesses face fading demands from home and abroad however, the data could foreshadow a stabilizing market as economists forecast the ISM index to increase to 36.0 from 35.8 in February. The final GDP reading for the fourth quarter showed that the world’s largest economy grew at its slowest pace since 1982 as personal consumption, one of the biggest drives of growth, plunged 4.3% from the previous quarter to mark its worst slump since record keeping began in 1947, and business may continue to cut back on production and investments as private-sector demands falter. As a result, factory orders fell for the sixth month in January as demands slipped another 1.9% after falling 4.9% in December, while wholesale sales plunged four times faster than stockpiles in January, and the data continues to emphasize the dire state of the economy as businesses slash their inventories at a record pace in an effort to reduce costs. Moreover, industrial outputs in February plunged 11% from the previous year, which is the biggest drop since 1975, while vehicle sales slipped to 9.1M during the month to reach its lowest level since 1981, and households are likely to curb their temperament for spending as they face a weakening labor market. On Friday, we are likely to see the annual rate of unemployment surge to a 25-year high as non-farm payrolls are expected to fall another 659K in March, and the ISM’s employment component could reinforce fears of a deepening downturn in the labor market if the gauge slips below 26.1, which is the lowest since the series began in 1948. Nevertheless, Fed Chairman Ben Bernanke spurred hopes for a swift recovery during an interview earlier this month, stating that ‘the recession will probably end this year and the economy will expand in 2010’as policy makers take unprecedented steps to stimulate the ailing economy however, the Organization for Economic Cooperation and Development said that the top 30 industrialized nations of the world will contract 4.3% this year and forecasts a 0.1% decline in 2010, and went onto say that ‘macroeconomic stimulus is also critical to cushion the fall in aggregate demand as the downturn in the global economy accelerates. Meanwhile, as G20 leaders hold a summit in London this week in response to the financial crisis, hopes for coordinated action by policymakers paired with support for a new reserve currency could weigh on the U.S. dollar however, if the group utterly fails to meet on common ground, a rise in risk aversion would bolster the greenback as it continues to benefit from its safe-haven status.
Ongoing weakness in manufacturing favors a bearish outlook for the U.S. dollar as growth and inflation falter however, an enhanced ISM report paired with a rebound in the employment would certainly set the stage for a long dollar trade for the given event risk. Therefore, if the index rises to 36.5 or higher with all of the sub-components increasing, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, 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 we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.
On the other hand, fading demands from home and abroad paired with expectations for further weakness in the global economy could weigh on business, and a drop in the index would lead us to short the greenback. As a result, if the ISM falls to 35.6 or lower, we will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.
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