Wednesday, 11 March 2009 11:38:27 GMT
Written by David Song, Currency Analyst
Full Article
What�s Expected
Time of release: 03/12/2009 12:30 GMT, 08:30 EST
Primary Pair Impact: EURUSD
Expected: -0.5%
Previous: 1.0%
Impact the U.S. retail sales report had over EURUSD for the past 2 months
January 2009 U.S. Retail Sales
Retail sales in the U.S. unexpectedly increased 1.0% in January to snap a six-month slump in private-spending however, domestic demands are likely to weaken further in the months ahead as households continue to face a weakening labor market. The breakdown of the report showed that the rise in consumption was driven by a 2.6% rise in gasoline receipts, which was followed by a 2.6% increase in electronics, while discretionary spending on clothing increased 1.6% during the month. Private-sector spending is likely to weaken further throughout the first half of the year as economists forecast the unemployment rate to push higher, and as the world�s largest economy faces its worst economic downturn in over a quarter century, the outlook for future growth remains bleak.
December 2008 U.S. Retail Sales
Private spending in the U.S. plunged 2.7% in December, marking its worst string of declines since comparable records began in 1992, and domestic demands are likely to deteriorate further as consumers continue to face a weakening labor market paired with tightening credit conditions. A deeper look into the report showed that sales at gasoline stations slipped another 15.9% after falling 18.3% in the previous month, while discretionary spending on clothing fell 2.5% during the month. The data foreshadows a deepening recession in the economy as private-sector spending, which is one of the biggest drivers of growth, falters, and will certainly weigh on the Obama Administration�s ability to jump-start the world�s largest economy as growths prospects deteriorate at a record pace.
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
Retail spending in the U.S. is expected to drop 0.5% in February as the world�s largest economy faces its worst economic downturn in over a quarter century, and the outlook for growth and inflation remains bleak as economic activity deteriorates at a record pace. The preliminary GDP reading showed that the annual rate of growth slipped 6.2% in the fourth quarter, which was the biggest economic contraction since 1982, while personal consumption dropped 4.3% from the third quarter to mark the largest drop in spending since 1980. Furthermore, a report by the Conference Board showed that consumer confidence fell to its lowest level since recordkeeping began in 1967, which foreshadows a weakening outlook for private-spending, and conditions are likely to get worse throughout the first half of the year as households face a weakening labor market. A government report released last week showed that non-farm payrolls plunged another 651K in February following a 655K drop in the previous month - the biggest contraction since 1949 - and marked the worst slump in employment since recordkeeping began in 1939. As a result, the annual rate of unemployment surged to a 26-year high of 8.1% from 7.6% in January, and the data continues to reinforce fears of a deepening recession as firms continue to cutback on spending and employment in an effort to reduce costs. Demands for durable goods slipped another 5.2% in January after falling 4.6% in the previous month, while factor orders dropped 1.9% during the same period, which continues to reflect a negative outlook for private-spending. Meanwhile, as the Federal Reserve holds a dour outlook for growth and inflation, and is widely expected to hold the benchmark interest rate at the record-low for �some time�, the unprecedented use of the central bank�s balance sheet paired with the rise in the government�s budget has stoked fears that the aggressive measures taken on by policy makers could pose a threat for long-term stability, which could weigh on the appeal of the greenback however, as risk sentiment continues to dictate price action in the currency market, the U.S. dollar is likely to hold its bullish trend over the near-term as the reserve currency continues to benefit from safe-haven flows.
Expectations for a drop in private-spending clearly favors a bearish outlook for the greenback however, an unexpected rise in retail sales like we saw in the previous month would lead us to enter a long dollar position for the given event risk. Therefore, if retail spending rises for the second month, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of EURUSD. Once these conditions are met, we will set our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based purely on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, fears of a deepening downturn in the economy paired with a weakening labor market is likely to weigh on household spending, and a drop in sales would certainly lead us to short the dollar. As a result, an in-line print or a drop of more than 0.5% in sales would set the stage for a short euro-dollar trade, and we will follow the same strategy as the long position mentioned above, just in reverse.
Growth Outlook Improves-Stronger Than ExpectationsChart
Recession Deepens- Lower Than Expectations Chart
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