Upcoming US Empire Manufacturing Report Next Test For US Dollar

The economic consensus is that the US Empire Manufacturing Index report, to be released 12-15-2008 @ 8:30 EST, will fall to -27.0 vs. November’s -25.4 and October’s -24.6 and September’s -7.4.  The picture is pretty clear, i.e. manufacturing activity has fallen off a cliff.

Hopes of a anything remotely close to a soft landing have been dashed. Housing prices continue to decline. GDP contracted -0.5% in 3Q and is projected to fall as much as -5.0% next quarter. Business investments dropped -5.7% in 3Q. October’s ISM report revealed manufacturing fell at its fastest rate in 26 years from 38.9 to 36.2.

During most of this, the dollar has continued to defy the laws of economic gravity mainly due to the demand for dollars as U.S. assets saw forced liquidations from deleveraging. From July 15th thru December 5th, the dollar appreciated 21.12%. Since this period, it has corrected @ -3.67% thru December 11th, There is no such thing as a free lunch. The stronger dollar has negatively impacted the trade deficit which grew to -$57.2bn (October)  from $56.6bn (September).

A survey by Daily FX reveals that traders will want to see considerable improvement in manaufacturing to at least a -10.0 reading before considering going long the dollar, while anthing below the -27.0 consensus would be a catalyst for further selling. If the report is positive, two ways of playing this without using the high leverage of futures currency contracts are the FXE (FXE) and UDN (UDN). Should the report surprise to the upside, investors and traders may want to consider playing the UUP (UUP).

Related securities: US Dollar Bearish Fund ETF (UDN); Rydex Currency Euro Trust ETF (FXE); US Dollar Bullish Fund ETF (UUP)

*Disclosures: Long US Dollar Bearish Fund ETF (UDN)

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