Forex: Risk Appetite Reinforced by Manufacturing ISM

Last updated 1/4/2010 10:15 AM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

Currencies and stocks are starting the New Year with a bang. On the heels of solid manufacturing data from China and an optimistic outlook for the New Decade, higher yielding currencies appreciated throughout the European trading and into the U.S. trading session. The broad sell-off in the U.S. dollar this morning indicates that risk appetite is driving price action in the foreign exchange markets. The Dow and Nasdaq climbed to a fresh 15 month highs as soon as the U.S. equity markets opened for trading and this momentum is reinforced by the strong U.S. ISM data.

U.S. Manufacturing Sector Chugging Along

In the month of December the ISM manufacturing index climbed to the highest level in more than 3.5 years. The details of the report were mostly encouraging with the new orders and employment components increasing. The increase in manufacturing activity should help to ease job losses in the sector. Despite the strength of the dollar last month, the manufacturing sector continues to chug along. The decline in new export orders suggests that the increase in demand could be domestic, which would be a nice change of pace. Also, the widening of the new orders-inventory gap points further increases in activity. The significant rise in the prices paid component indicates that inflationary pressures are beginning to return. Although construction spending declined for the seventh month in a row, the pace of contraction is not as significant as the average decline over the past year.

The big question this week is whether the U.S. Payrolls will rise for the first time in 2 years. Many economists are optimistic and believe that job growth has returned. Although we are skeptical, we recognize that the price action in the dollar reflects this same sentiment. We will reserve our judgment on payrolls until Wednesday's ADP, Challenger and service sector ISM reports after which we will publish our outlook for NFPs.

Comments (3)

yen-jan

January 04, 2010 at 10:54 AM ET

Anybody know whether there was a news trigger for the sell-off in GBP vs. all currencies this morning, after GBP strength overnight?

Pink Elephant

January 04, 2010 at 02:57 PM ET

Isn`t the dollar a little bit too high? I mean over 170 pips up Monday morning and then stay there even when Manufacturing ISM were so good?

Jasonjit

January 04, 2010 at 03:19 PM ET

The 4th quarter GDP is going to be larger than the first 3 quarters in 2009 due to excessive inventory cut. This will probably send the market higher and the dollar lower. The Fed hasn't actually implemented the actual withdrawing of the excess liquidity and the talk only boost the dollar temporarily. The fundamental for the dollar is still the same unless something in the European Nations that push the ECB to issue debts which would cause investors to buy dollar.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.