EUR/USD: Trading the U.S. Durable Goods Orders Report

Published August 25th, 2009 - 03:53 GMT

Orders for U.S. durable goods are expected to improve in July, with economists forecasting demands to increase 3.0% from the previous month, and the rise in private-sector spending is likely to reinforce prospects for a sustainable recovery as policymakers anticipate economic activity to improve throughout the second-half of the year.



Trading the News: US Durable Goods Orders

What’s Expected

Time of release:                  08/26/2009 12:30 GMT, 08:30 EST
Primary Pair Impact :          EURUSD

Expected:                              3.0%

Previous:                               -2.5%

Effects of US Durable Goods Orders on EURUSD for the past 2 months

 


June 2009 US Durable Goods Orders

Demands for U.S. durable goods plunged 2.5% in June, driven by a 39% drop in commercial aircrafts however, orders excluding transports unexpectedly rose 1.1% from the previous month, and the data encourages an improved outlook for future growth as policymakers take unprecedented steps to stimulate the ailing economy. A deeper look at the report showed stockpiles fell for the sixth consecutive month in June, while unfilled orders  fell 0.9% from the previous month, and firms may increase production and investments throughout the second half of the year as demands improve. However, the downturn in the labor market paired with the rise in the personal savings rate foreshadows a weakening outlook for household spending, and the Fed is likely hold the benchmark interest rate at the record-low going into the following year to promote a sustainable recovery.



May 2009
US Durable Goods Orders

U.S. durable goods orders unexpectedly rose 1.8% for the second consecutive month in May, led by a jump in commercial aircrafts, and the rebound in demands suggests the economic downturn may be nearing an end as policymakers take extraordinary steps to jump-start the ailing economy. The breakdown of the report showed  shipments tumbled 2.1% from April, with unfilled orders falling 0.3% during the same period, while inventories contracted for the fifth consecutive month in May. However, the rise in the personal saving rate paired with the slump in the credit market may lead businesses to scale back on production and employment throughout the second-half of the year in an effort to weather the downturn global trade, and economic activity may remain subdued over the remainder of the year as households face a weakening labor market paired with fears of a protracted downturn.



What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:


If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.




How To Trade This Event Risk

Orders for U.S. durable goods are expected to improve in July, with economists forecasting demands to increase 3.0% from the previous month, and the rise in private-sector spending is likely to reinforce prospects for a sustainable recovery as policymakers anticipate economic activity to improve throughout the second-half of the year. The advanced GDP reading showed economic activity contracted at a slower pace in the second quarter, led by a surge in public spending, and the unprecedented steps taken on by the government may continue to soften the landing of the world’s largest economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits 1.75T in asset purchases to shore up the financial system. At the same time, a report by the Commerce Department showed factory orders unexpectedly increased 0.4% in June to mark the third consecutive monthly rise, while wholesale inventories slumped 1.7% during the same period amid expectations for a 0.9% drop, and businesses may increase their rate of production over the coming months as demands from home and abroad improve. However, a separate report showed personal incomes tumbled at an annualized rate of 4.7% in June to post the biggest decline since the series began in 1960, while retail spending unexpectedly declined 0.1% in July, and the rising trending in the savings rate paired with fears of a slower recovery may continue to drag of private-sector consumption as the outlook for growth and inflation remains weak. Nevertheless, the FOMC raised its economic outlook in June and expects the economy to expand going into  the following year, and the central bank is widely expected to maintain a dovish policy stance going forward as policymakers see a risk for a slower recovery. Moreover, Chairman Ben Bernanke held an improved outlook for the world’s largest economy during the Fed summit at Jackson Hole, Wyoming, stating that the “prospects for a return to growth in the near term appear good.” However, the central bank head went onto say that the recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels,” and the rise in the jobless rate may continue to weigh on the outlook for future growth as private-sector spending accounts for more than two-thirds of the economy. As growth prospects improve, the rise in the interest rate outlook may drive the greenback higher against its major counterparts however, as risk trends continue to drive price action in the currency market, the dollar may continue to lose ground as investors raise their appetite for higher yielding assets.

Trading the given event risk favors a bullish outlook for the reserve currency, and price action following a rise in durable goods could set the stage for a short euro-dollar trade. Therefore, if orders increase 3.0% or more in July, we will look for red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.


In contrast, fears of a slower recovery paired with the slump in global trade may lead household and business to scale back on spending as the outlook for future growth remains weak, and an unexpected drop in durable goods orders could drag on the exchange rate as investors weigh the outlook for a sustainable recovery. As a result, if demands fall 0.2% or greater from the previous month, we will favor a bearish forecast for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

 


 

 

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