Demands for U.S. durable goods are expected to fall for the first time in three-months, with economists forecasting a 0.6% drop in June, and fears of a protracted downturn could drag on the exchange rate as investors weigh the outlook for a sustainable recovery.
[B][U]Trading the News: US Durable Goods Orders[/U][/B]
[B][U]
[/U][/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]07/29/2009 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: -0.6%
Previous: 1.8%
[B][U]
[/U][/B]
[B][U]Effects of US Durable Goods Orders on EURUSD for the past 2 months[/U][/B]
[B][U][/U][/B]
[U]May 2009 US Durable Goods Orders[/U][U][/U]
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.
[U]
April 2009 US Durable Goods Orders[/U][U][/U]
Orders for U.S. durable goods jumped 1.9% in April, led by demands for automobiles , and the data encourages an improved outlook for future growth as the government takes unprecedented steps to shore up the world’s largest economy. A deeper look at the report showed inventories fell for the fourth month in April, with shipments falling 0.2% from the previous month, while unfilled orders slipped 1.2% during the month. As a result, market participants speculate firms will replenish inventories in the second-half of the year as trade conditions improve however, the downturn in the labor market paired with tightening credit conditions may hamper the prospects for future growth as domestic demands falter. As the economic outlook remains dim, policymakers may take further steps to stimulate the ailing economy, and the Federal Reserve is widely expected to keep borrowing costs at the record-low throughout the year in an effort to stem the downside risks for growth and inflation.
[B]
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]
[B][U][/U][/B]
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.
[B]
How To Trade This Event Risk[/B]
Demands for U.S. durable goods are expected to fall for the first time in three-months, with economists forecasting a 0.6% drop in June, and fears of a protracted downturn could drag on the exchange rate as investors weigh the outlook for a sustainable recovery. The final GDP reading showed economic activity contracted 5.5% in the first quarter, with business spending marking the biggest decline since recordkeeping began in 1947, and firms may continue to scale back on production and employment throughout the second half of the year in an effort to weather the downturn in global trade. A report by the International Council of Shopping Center said chain-store sales slumped for the eleventh month in June, while the personal savings rate jumped to a 15-year high of 6.9% in May, and the weakening outlook for private consumption is likely to hamper the prospects for a sustainable recovery as households face a weakening labor market paired with tightening credit conditions. At the same time, retail spending increased for the second-month in June, led by a rebound in auto sales, while business inventories fell for the ninth month in May, and the pick-up in domestic demands may lead firms to replenish their stockpiles of unsold goods in the coming months as the Federal Reserve expects an economic recovery next year. The FOMC meeting minutes for June reinforced an improved outlook for the world’s largest economy as the central bank anticipates economic activity to contract at a slower pace in the second-half of the year however, the statement went onto say that ‘most participants saw the economy as still quite weak and vulnerable to further adverse shocks.’ Nevertheless, the MPC maintained its current policy in place as the board forecasts GDP to expand over the next two-years, and speculation for an economic recovery later this year may drive demands for the greenback as market participants anticipate the central bank to tighten policy over the next 12 months. Credit Suisse overnight index swaps show investors are pricing a 75bp rate hike for the following year as growth prospects improve, and long-term expectations for higher interest rates could lead the dollar to appreciate against it currency counterparts in the months ahead. Meanwhile, as risk trends continue to drive price action in the foreign exchange market, a rise in risk appetite could weigh on the reserve currency as participants move into higher risk/reward investments.
Expectations for a 0.6% in U.S. durable goods orders favors a bearish outlook for the dollar but nevertheless, the unexpected rise during the previous month has left the door open for an upward surprise. Therefore, if demands rise 0.5% or greater in June, we will look for a 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 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 contrast, fears of a protracted downturn paired with the slump in global trade may lead businesses to scale back on spending and investments in an effort to reduce their cost structure, and price action following the release could set the stage for a long EUR/USD trade. As a result, if demands for durable goods falls 0.6% or greater in June, we will favor a bearish forecast for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.
[I][B]Visit the [/B][/I][I][B]DailyFX Forex Stream[/B][/I] [I][B]for Real-Time News and Market Updates[/B][/I]