PMI Forex

What is PMI, and why is it important?

PMI stands for Purchasing Manager’s Index. It is an economic indicator that is compiled from monthly surveys of companies in the private sector. It basically indexes the main direction of economic trends in the manufacturing and service industries and summarizes the state of market conditions (whether they are expanding, remaining static, or contracting, according to purchasing managers.)

PMI is important for company decision-makers, analysts and investors, as its purpose is to provide information about current and future business conditions.

It is also a leading indicator of overall economic activity in the U.S.A., the U.K., China, Japan, Australia, Canada and the Eurozone.

How does PMI Forex impact currency markets?

As an indicator that effectively shows whether the economic sector of a country is improving or deteriorating, the PMI has a big impact on currency markets. Usually, if there is an improvement in a country’s PMI, that same country’s currency tends to be bullish. For example, if the PMI in the U.S.A. improved since the last report, the USD experiences an upward trend. At the same time, if the PMI declines, then the USD is likely to weaken.

An exception to the rule is the Japanese Yen (JPY), as it is tied more to general market sentiment rather than domestic data and so tends to ignore the PMI. The Swiss Franc (CHF) is another exception, as it tends to react negatively to improvements in the PMI of major economies in the world and positively to their deterioration.

Understanding the PMI Forex report and its components

There are two main types of PMI: The Manufacturing PMI and the Non-manufacturing PMI (services). A third PMI exists for the construction sector (Construction PMI), however, this tends to be less impactful and is reported less frequently. Composite PMI refers to key data received by combining manufacturing and services sectors.

The PMI consists of 5 survey indices:

• New orders (30%)

• Output (production) (25%)

• Employment (20%)

• Suppliers’ delivery times (15%)

• Stocks or purchases (10%)

We should mention that different producers of PMI put different weights on each of these components, but the percentages stated are the most commonly used.

Analyzing PMI Forex data and interpreting market trends

PMI can be calculated using a simple formula:

PMI = (P1 x 1) + (P2 x 0.5) + (P3 x 0)

Where 

P1 = percentage of answers reporting an improvement

P2 = percentage of answers reporting no change

P3 = percentage of answers reporting deterioration

So if the number we get from this equation equals 50.0, we consider it a neutral reading, which means there was no change in the sector.

A reading above 50.0 means an improvement in the sector, while a reading below 50.0 indicates deterioration.

Key factors to consider when trading PMI Forex

Even though PMI reports are excellent indicators of how the economy is doing and help provide deeper insights about companies and the factors that may be affecting them, its main shortcoming is it does not lead to substantial market movement, especially when it comes to stocks and currencies.

It remains, however, an extremely important component to consider while performing fundamental analysis, as it helps traders anticipate the general market direction when trading currencies, commodities, and stocks. This is why it is one of the most important tools used by Wall Street analysts.