EUR/USD: Trading the U.S. Existing Home Sales Report

Demands for existing home in the U.S. are expected to improve for the fourth consecutive month in July, with economists forecasting purchases to increase 2.1% from the previous month, and the data is likely to reinforce expectations for an economic recovery later this year as the housing market begins to stabilize.

[B][U]Trading the News: U.S. Existing Home Sales[/U][/B]

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[B][U]What’s Expected[/U][/B]

Time of release: [B]08/21/2009 14:00 GMT, 10:00 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]

Expected: 2.1%

Previous: 3.6%

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[B][U]Effects of Existing Home Sales on EURUSD for the past 2 months[/U][/B]

[U]June 2009 [/U][U]U.S.[/U][U] Existing Home Sales[/U]

                                     Demands   for existing homes in the U.S.   improved for the third month in June, with purchases rising 3.6% to an annual   rate of 4.89M, and the data encourages as improved outlook for future growth   as policymakers take unprecedented steps to soften the landing of the world’s   largest economy. A deeper look at the report showed demands for single-family   homes increased 2.4% from May, while sales of condominiums jumped 14%, and   the drop in property prices may continue to lure potential home buyers as the   Federal Reserve holds the benchmark interest rate at the record-low. However,   as households face a weakening labor market paired with tightening credit   conditions, policymakers may take additional steps in the second-half of the   year to stem the downside risks for growth and inflation in an effort to   foster a sustainable recovery.

                         [U]May 2009 U.S. Existing Home Sales[/U]

                                     Existing   home sales in the U.S.   increased 2.4% in May to an annualized rate of 4.77M, which was slightly   weaker than market forecasts, and the slump in the housing market may   continue to drag on the real economy throughout the second-half of the year as   households face falling property values paired with tightening credit   conditions. As the outlook for growth and inflation remains weak, policymakers   may continue to ease policy this year in order to steer the economy out of   the recession, and the Federal Reserve is likely to hold a dovish policy   stance going forward as the board sees a risk of a slower recovery. As a   result, the central bank is likely to keep borrowing costs at the record-low   throughout the rest of the year, and may expand its $1.75T asset purchase   program in the month ahead as the mortgage market remains impaired.

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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]

Demands for existing home in the U.S. are expected to improve for the fourth consecutive month in July, with economists forecasting purchases to increase 2.1% from the previous month, and the data is likely to reinforce expectations for an economic recovery later this year as the housing market begins to stabilize. 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 extraordinary efforts 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 pledges 1.75T in asset purchases to shore up the financial system. At the same time, a report by the Congressional Oversight Panel for TARP said smaller banks in the U.S. may need an additional $12-14B in capital ‘as the estimated losses will outstrip the projected revenue and reserves,’ while the Federal Deposit Insurance Corp. announced bank closures rose to 72 in 2009 versus 25 failures in the previous year, bringing the total cost to $16.6B year-to-day compared to $17.6B in 2008. As a result, the oversight panel has called upon policymakers to take additional steps to shore up the balance sheets for smaller institutions as the mortgage market remains impaired, and fears of a slower recovery may lead the central bank to ease policy further in order to jump-start the ailing economy. The Federal Reserve held borrowing costs at the record-low and maintained asset purchase scheme earlier this month, and went onto say that the interest rate will remain ‘exceptionally low’ as economic activity is ‘likely to remain weak for a time.’ In addition, the MPC stated ‘household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit,’ and the slack in private-sector spending may continue to weigh on the outlook for future growth as personal consumption accounts for more than two-thirds of the economy. Nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk appetite may continue to support the rising trend in the EUR/USD as traders move into higher risk/reward investments.

Trading the given event risk favors a bullish forecast for the greenback as market participants anticipate existing home sales to increase for the fourth month in July, and price action following the release could set the stage for a short euro-dollar trade. Therefore, if purchases increase 2.1% or more 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 set our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first objective. Our second target 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, tightening credit conditions paired with the fading demands for employment could weigh on demands for existing homes, and an unexpected decline in home purchases is likely to weigh on the economic outlook as policymakers see a risk for a slower recovery. As a result, if sales unexpectedly falls 0.4% or greater, 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 revealed above, just in reverse.

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