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According to the ISM report, activity in the manufacturing sector has contracted for the 13th consecutive month but the contraction is slowing. After hitting a 26 year low in the month of December, the manufacturing sector ISM index rebounded in January from 32.9 to 35.6.  The improvement is not entirely surprising since many of the regional manufacturing reports also increased last month.  The employment component of the report remained unchanged which suggests that even though the manufacturing sector continued to lose jobs, the pace of losses are moderating.  Although the prices paid component also edged higher, inflation is not concern.  Overall, the manufacturing sector is still a long way from recovery which is why the impact on the US dollar has been limited.  

Personal Income and Spending

In the past 6 months, US consumers have changed their spending habits significantly. Most Americans use to spend more than they make and continued to spend even as their incomes were shrinking. However the recession and job losses have finally hit home, forcing consumers to stop spending and start saving. In December ,personal spending declined for the sixth consecutive month while personal income saw zero to negative growth for the fourth consecutive month. 2008 was the worst year for spending since 1961. With the US economy expected to remain weak throughout the first half of the year, we expect consumers to cut back even more.  The only way for retailers to drive sales will be through discounts and incentives which mean slimmer margins or even losses. Everyone is in survival mode and Friday's non-farm payrolls number will only raise the tension amongst Americans.  
Stimulus Package

Stocks are the starting the week down more than 200 points, leading to continued risk aversion in the currency markets.  With the non-farm payrolls report due for release on Friday, we could see more liquidation ahead of what is expected to be an abysmal number.  The only hope is for a strong vote in favor of stimulus package.  The full Senate is expected to be voting on its version of the bill on Wednesday.  If the bill differs significant from the House's version, more discussion and revisions will be needed. Realistically, President Obama may not have a bill that is ready to be signed until mid February which could mean more selling of currencies and equities before then.

Here is a look at how all of the major currencies performed against the US dollar in January.  The Japanese Yen was the only currency to outperform the greenback:

 

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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.