U.S. retail sales are forecasted to have fallen by 2.1% in September following last month’s 2.7% gain which was driven by government’s “cash for clunkers” plan.
[U][B]Trading the News: U.S. Advance Retail Sales[/B][/U]
What’s Expected
Time of release: [B]10/14/2009 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B] EURUSD[/B]
Expected: -2.1%
Previous: 2.7%
[U][B]Impact the U.S. retail sales report has had over EURUSD for the past 2 months[/B][/U]
[U] August 2009 U.S. Retail Sales[/U]
Sales at U.S. retailers surged in August by the most in three years, led by a jump in auto purchases as consumers took advantage of the government’s “cash-for-clunkers” program. The 2.7 percent increase exceeded forecasts of 1.9%. Purchases excluding automobiles climbed 1.1 percent, as clothing and electronics saw strong gains as well. Auto sales increased by the most in almost eight years, as buyers traded in older models for new, more fuel-efficient vehicles. The gain in spending was broad-based as 11 of 13 categories registered increases, easing concern that rising unemployment and a record loss of household wealth will cause Americans to retrench. An initial bullish dollar reaction would have kept us on the sidelines as we were expecting the greenback’s correlation to risk to hold which it eventually did leading the EURUSD to trade higher on the day.
[U]July 2009 U.S. 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.
[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]How To Trade This Event Risk [/B]
U.S. retail sales are forecasted to have fallen by 2.1% in September following last month’s 2.7% gain which was driven by government’s “cash for clunkers” plan. The absence of stimulus efforts left consumer s unmotivated to spend as they continue to face rising unemployment and strained credit conditions. The artificially generated demand for automobiles set the bar too high for Americans to meet and we should see consumption levels return to its prior trend of inconsistency. Rising home prices and the economy remove from the brink of a complete collapse will inspire some spending but consumers shell shocked from the credit crisis remain prone to paying down existing debt than opening up their wallets. Markets may take solace in the forecast for a 0.2% gain in sales minus automobiles. However, September is viewed as the month that sets the pace for Holiday spending and a weak figure could spark pessimism and risk averse behavior. Traders looking to trade the event risk must be aware of corporate earnings release near the time of release and the FOMC meeting minutes later in the day.
Traditionally weak consumer consumption is a negative for the U.S. dollar but with the greenback maintaining its correlation with risk, we expected a bullish reaction to the dour data. However, traders must guard against an initial bearish breakout like the bullish one saw last month. Therefore, if spending falls more than 2.1% and we have a corresponding decline in the core reading then, 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.
Conversely, a less than forecasted decline in consumer demand could spark risk appetite and lead to bearish greenback sentiment. If this is the case then we would utilize the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse. However, we must caution that a positive gain in consumption could generate bullish dollar sentiment and must be taken into consideration before taking a position.
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[I]
To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]