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U.S. Dollar: Retail Sales on Tap − How Will the Greenback React?

Fri, Nov 14 2008, 07:03 GMT
by Daily FX Research Team

DailyFX

Economic activity is expected to weaken further in the U.S. as market participants anticipate retail spending to fall 2.1% in October. A fourth consecutive monthly decline in sales would certainly heighten the downside risks to growth as private-sector consumption, one of the two main drivers of growth, falters, which could stoke increased fears that the world’s largest economy may face a deep and severe recession over the coming months.

Trading the News: U.S. Advance Retail Sales

What’s Expected

Time of release: 11/14/2008 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -2.1%

Previous: -1.2%

Effect the U.S. retail sales report had over EURUSD for the last 3 months

September 2008 U.S. Retail Sales

Private-sector spending in the U.S. fell for the third consecutive month in September for the first time since recordkeeping began in 1992 as retail sales plunged 1.2% from the previous month. Fading employment opportunities paired with falling home prices have clearly taken a toll on consumers, and consumers may cutback on spending even further as fears of a global recession intensify. The downturn in consumption has become a growing as private-sector consumption accounts for more than two-thirds of GDP, which suggests that conditions may only get worse before they improve. Meanwhile, the proactive Fed increased their efforts in order to stave off further downturns in the economy as they lowered the benchmark interest rate by 50bp to 1.00%, and could be forced to reduce borrowing costs even further as growth prospects deteriorate.

August 2008 U.S. Retail Sales

Retail spending in the U.S. unexpectedly declined for the second consecutive month in August, indicating that higher gas prices paired with fading employment demands are certainly taking a toll on consumers. Private-sector consumption slipped another 0.3% after falling 0.5% in the previous month, and conditions may only get worse as the downturn in the housing sector continues. Meanwhile, retail sales excluding the volatile automotive component fell 0.7% after rising 0.3% in July, signaling that economic activity may remain subdued as consumers cutback on spending. The data highlights that growth concerns have certainly intensified since the first half of the year, which could lead the Fed to a dovish outlook going forward as growth prospects deteriorate.

July 2008 U.S. Retail Sales

U.S. retail sales slipped for first time in five months as record high gas prices pushes consumers to cutback on spending. The average gas price reached a new high of $4.06 in July, which led to a 2.4% drop in auto sales. The report showed that the headline reading fell 0.1 from June, while sales excluding autos slipped to 0.4% from 0.9%. Higher living costs prices paired with tightening credit conditions has clearly taken a toll on the retail sector, and is anticipated to only get worse as the effects of the fiscal stimulus checks dissipate. The lack of direction following the release has left us without a trade.

How To Trade This Event Risk

Economic activity is expected to weaken further in the U.S. as market participants anticipate retail spending to fall 2.1% in October. A fourth consecutive monthly decline in sales would certainly heighten the downside risks to growth as private-sector consumption, one of the two main drivers of growth, falters, which could stoke increased fears that the world’s largest economy may face a deep and severe recession over the coming months. In fact, the advanced GDP reading for the third quarter showed that the economy contracted 0.3% from the previous quarter as personal consumption dropped 3.1% during the same period to record its biggest decline since 1980. The remarkable slowdown in spending lowered domestic vehicle sales to 7.9M from 9.6M in September, followed by a 2.5 decline in factory orders. In addition, the dour outlook led consumer confidence to reach its lowest level since recordkeeping began in 1967 as the index plunged to 38.0 from a revised reading of 61.4 in September. Moreover, the unemployment rate rose to a 14-year high as non-farm payrolls fell another 240K in October, following a 284K drop in the prior month. Fading employment opportunities paired with deteriorating fundamentals suggests that policymakers may increase their efforts over the coming months as the growth outlook turns increasingly bleak. Earlier this week, House speaker Nancy Pelosi pushed for ‘immediate action’ to bailout the troubled automakers in the U.S. in order to avoid a 2.5M loss in jobs, and despite the opposition from the White House, House Financial Services Committee Chairman Barney Frank endorsed the plea for automakers as he is expected to arrange a hearing for November 19th to set aside $25B in loans from the Treasury’s bailout package to save the automotive industry. Meanwhile, Fed Fund Futures are showing that investors forecast a 94% chance that the FOMC will lower the benchmark interest rate by 50bp to 0.50% at the December 14th policy meeting, while they see a 6% chance for a 75bp rate cut to 0.25%. Lower interest rate expectations paired with a fall in spending could spur increased selling pressures for the U.S. dollar, but the greenback may continue to reap the benefits of its safe haven status as demands for carry trades falter.

Despite expectations for a decline in retail sales, cheaper gas prices could spur an unexpected rebound in consumption, which could lead the EURUSD to break below the 1.2400 level. As a result, a positive sales reading would favor a short EURUSD trade, and we will look for a red, five-minute candle following the release to trigger an entry on two lots of the euro-dollar. We will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first half of the trade reaches its target.

On the other hand, the lack of stability in the financial sector paired with increased growth fears has certainly taken a toll on consumers, and conditions may only get worse as firms continue to cutback on employment in order to reduce costs. Consequently, a 2.1% decline or more in retail sales would certainly favor a bullish EURUSD trade, and we will follow the same setup as the short trade mentioned above, just in reverse.

Published on  Fri, Nov 14 2008, 07:15 GMT