The Significance of PMI on Currency Fluctuations



Purchasing Managers Index, or what is known as PMI, is an economic report that draws conclusion from business surveys and indicates business climate in a certain country during a particular time period. They usually survey several private companies in the country and track indicators like new orders, production, employment, supplier deliveries, etc.
PMI on forex

What is PMI?

PMI presents an advance report for companies, economists, and analysts on private sector condition. In this regard, PMI often seen as more comprehensive and useful than ordinary economic datas such as GDP (Gross Domestic Products). GDPs are published quarterly, and it is too long for companies to wait for GDP before making important decisions. Beside of that, different countries often have different method of calculating GDP. The way Eurozone counts their GDP, for example, is different from Japan. Such difference makes them practically incomparable. Contrarily, an independent institution that counts PMI for many countries will certainly use similar method.

Unlike other economic reports published by government bodies, PMI commonly held and published by private institutions. This ensures the independence of the survey and lend credibility to the result. Two institutions that publish periodical PMI are:
  1. Institute for Supply Management (ISM)
    ISM organizes monthly US PMI, as well as hosting JPMorgan Global PMI Report. US PMI Report from ISM is published into two parts, Non-Manufacturing and Manufacturing PMI. Apart from that, ISM also collaborates with several other establishments to issue Taiwan Manufacturing PMI Report.
  2. Markit Economics
    Markit Economics conducts PMI of about 30 countries, including Eurozone and countries within it, Canada, China, India, Indonesia, Russia, UK, US, etc. Markit Economics PMI comprises of Manufacturing PMI, Services PMI, Construction PMI, Retail PMI, and Composites. Markit Economics surveys following countries (depicted on the map):
    Markit PMI countries

The Influence of PMI on Forex

PMI comes in a scale of 100, with median 50. Any number under 50 means the economy is in contraction, while over 50 suggests business improvement. A decrease could be read as economic decline on the period, while an increase shows ongoing recovery. Of course, a 50 is also possible, though it is a very small possibility. However, it means that the conditions are somehow unchanged; no decline for sure, but no progress either.

Although it is originally created to provide much-needed datas for companies, in recent years forex traders also keep track of PMI releases. As the result, PMI often determine short trends and may inflict high fluctuations in forex market after it is released to the public. PMI releases for the US, UK, Eurozone, Canada, and China are especially marked on fundamental calendars as they are sometimes presents challenging circumstances.

China PMI have significant influence on currencies like AUD and NZD, as Australia and New Zealand have relatively close trade relations with China. Disappointing China PMI has been known to push AUD down. The reason why it has such impact could very well because people are unsure whether China government are truthful enough when it comes to bad statistics or signs of economic decline. Therefore, observing PMI becomes as important as observing Government-stamped GDP. 

PMI also have moderate to high influence on currencies like the Euro that's sensitive to economic growth. On 23 January 2014, EUR/USD shot to the peak in almost 4 weeks after Markit announced that Eurozone PMI was at its highers since June 2011. Within Eurozone itself, German PMI can push or pull the Euro. But for countries like the US, PMI usually has low influence and doesn't do much on its currency fluctuations.(seputarforex)