There is talk that the soft Richmond Fed released today points toward a US recession but first, we will need to see better confirmation in the ISM manufacturing index.
Comparing the smaller regional indexes to the ISM, we see a reasonable correlation, although the Philly fed is prone to wide swings. Richmond tends to be at the leading edge.
It’s important to note, however, that both the Empire and Philly surveys bounced in July. The current consensus estimate for the ISM index is a rebound to 50.5 from 49.7.
It’s difficult to find a good correlate in the FX market to US manufacturing. One reasonable comparison is CAD/JPY which makes sense because Canadian manufacturing follows a similar cycle to the US and is dependent on global growth (similar to US exports).
In interesting period to look at is March-Sept 2011. During that period, the ISM fell 8 points and CAD/JPY fell 1000 pips. A similar fall to 47 in the ISM would target 72.00 in USD/CAD — 450 pips below spot and roughly inline with the Sept 2011 low.
