EUR/USD: Trading the U.S. Advanced Retail Sales Report

Retail spending in the U.S. is forecasted to increase 1.9% in August following the government’s ‘cash for clunker’ incentive program, and the rise in private-sector consumption may drive the dollar higher as policy makers anticipate economic activity to improve throughout the second half of the year.

[B][U]Trading the News: U.S. Advance Retail Sales[/U][/B]

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[B][U]What’s Expected[/U][/B]

Time of release: [B]09/15/2009 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]

Expected: 1.9%

Previous: -0.1%

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[B][U]Impact the U.S. retail sales report has had over EURUSD for the past 2 months[/U][/B]

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[U]July 2009 [/U][U]U.S.[/U][U] Retail Sales[/U]

                                     U.S.   retail sales unexpectedly slipped 0.1% in July to mark the first decline in   three-months, and households may continue to scale back on consumption as   they face a weakening labor market paired with the downturn in lending   practices. The breakdown of the report showed auto sales increased 2.4%   following the ‘cash for clunkers’ program, with demands for clothing   increasing 0.6% from the previous month, while spending on food and beverages   slipped 0.3% from June. As the government offers cash incentives to shore up   the ailing auto sector, the rise in auto sales is likely to boost the growth   rate in the second-half of the year however, as the government stimulus   tapers off, fears of a slower recovery may lead households to ramp up their rate   of savings as the outlook for future growth remains uncertain. As a result,   the Federal Reserve may ease policy further in the coming months, and is   likely to hold a dovish policy stance going into the following year.  

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June 2009 U.S. Retail Sales[/U]

                                     Household   spending in the U.S. increased 0.6% in June amid expectations for a 0.4%   rise, and the extraordinary efforts taken on by the government is likely to   instill an improved outlook for future growth as policy makers anticipate   economic activity to expand towards the end of the year. A deeper look at the   report showed demands for motor vehicles jumped 2.3% following the government   incentive to purchase lower emission automobiles, with gasoline receipts   rising 5.0% on the back of higher oil prices, while discretionary spending on   food and beverages increased for the second consecutive month in June. Nevertheless,   as households continue to face a weakening labor market paired with   tightening credit conditions, consumers may scale back their rate of spending   as policy makers see a risk for a slower recovery, and the slump in   private-sector consumption is likely to weigh on economic activity going   forward as it accounts for more than two-thirds of GDP.

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What To Look For Before The Release[/B]

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:

                                      [B][U]Bullish   Scenario:[/U][/B]

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         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.

                                   [B][U]Bearish   Scenario:[/U][/B]
         
         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.

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How To Trade This Event Risk[/B]

Retail spending in the U.S. is forecasted to increase 1.9% in August following the government’s ‘cash for clunker’ incentive program, and the rise in private-sector consumption may drive the dollar higher as policy makers anticipate economic activity to improve throughout the second half of the year. The final GDP reading showed economic activity slipped at an annual rate of 1.0% in the second quarter amid expectations for a 1.5% contraction, with personal consumption falling at a slower pace than initially expected, and the extraordinary efforts taken on by the government should continue to support the ailing economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits $1.75T in asset purchases to stem the downside risks for growth and inflation. Moreover, domestic auto demands rose to an annualized pace of 10.2M in August, with the U. of Michigan consumer confidence survey topping expectations in September, and households may hold an enhanced outlook for the economy going forward as growth prospects improve. However, a report by the Commerce Department showed personal incomes held flat in July after falling 1.1% in the previous month, while chain-store sales weakened for the twelfth month in August, and the slump in private wages may weigh on economic activity in the months ahead as households face fading demands for employment paired with tightening credit conditions. In addition, a report by the central bank showed consumer credit plunged at an annual rate of $21.6B in July to mark the biggest drop on record, while the annual rate of unemployment surged to a 26-year high of 9.7% in August, and households may turn increasingly pessimistic towards over the coming months as the Fed forecasts the jobless rate to reach 10% by the end of the year. At the same time, Treasury Secretary Timothy Geithner reinforced a weakened outlook for the economy and anticipates job losses to peak in the second-half of 2010 as businesses continue to scale back on production and employment, and the slump in the labor market may hamper the prospects for a sustainable recovery as private-sector spending falters. As the outlook for growth and inflation remains weak, market participants speculate the central bank to maintain its current policy going into 2010 however, investors may scale back long-term expectations for higher interest rates as policy makers continue to see a risk for a slower economic recovery. Nevertheless, as risk trends dictate price action in the foreign exchange market, a rise in risk appetite may weigh on the reserve currency as investors move into higher yielding assets.

Trading the given event risk favors a bullish outlook for the greenback as economists forecast retail sales to jump higher in August, and price action following the release could set the stage for a short euro-dollar trade as the outlook for future growth improves. Therefore, if spending advances 1.9% or greater from the previous month, we will look for a red, five-minute candle following the data to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high, 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 preserve our profits.

In contrast, falling wages paired with the downturn in the labor market is likely to weigh on household sentiment as policy makers anticipate employment to fall further going into the following year, and fears of a slower recovery may lead households to ramp up their rate of savings as the economic outlook remains uncertain. As a result, if the data fails to meet expectations or unexpectedly falls lower from the previous month, we will favor a bearish forecast for the greenback, and will utilize the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]