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

Wed, Feb 25 2009, 06:04 GMT
by Daily FX Research Team

DailyFX

Demands for existing homes in the U.S. are expected to rise for the second consecutive month in January as potential home buyers take advantage of the record drop in home prices however, as household face a weakening labor market paired with fears of a deepening recession, the outlook for the housing sector remains bleak.

Trading the News: U.S. Existing Home Sales

What’s Expected

Time of release: 02/24/2009 15:00 GMT, 10:00 EST

Primary Pair Impact : EURUSD

Expected: 1.3%

Previous: 6.5%

Effects of Existing Home Sales on EURUSD for the past 2 months

December 2008 U.S. Existing Home Sales

Existing home sales in the U.S. unexpectedly increased in December after dropping at a record pace in the previous month as falling home prices spurred demands among potential buyers. Home purchases rose 6.5% during the month to an annual pace of 4.74M from 4.45M in November as prices dropped 15% from the previous year, which was the biggest decline since recordkeeping began in 1968. A deeper look at the report showed that sales of single-family homes rose 7.0% after falling 8.9% in November, while purchases of multi-family homes increased 2.1% after dropping 13.0% in the previous month. Despite the rebound in home sales, the data continues to reflect dour outlook for the housing market as home prices continue to fall lower, and as credit conditions remain far from normal, housing conditions are likely to deteriorate further this year.

November 2008 U.S. Existing Home Sales

The outlook for the U.S. housing market weakened further as existing home sales fell at a record pace in November.
Purchases of homes fell 8.6% after dropping 3.1% in October, and conditions are likely to get worse as prices continue to fall further. The breakdown of the report showed home prices slipped another 13% during the month, while demands for homes weakened throughout the country. Mounting growth concerns paired with the downturn in the labor market lead the FOMC to lower the benchmark interest rate to a range of zero to 0.25%, and went onto say that the central bank may increase its purchases of debt from Fannie and Freddie in an effort to reduce mortgage costs for home owners. Despite the extraordinary efforts taken on by the Fed and the U.S. Treasury, the downturn in the housing sector is likely to carry through into the next year as credit conditions remain far from normal.

What To Look For Before The Release

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:

Bullish Scenario:

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.

Bearish Scenario:

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.

How To Trade This Event Risk

Demands for existing homes in the U.S. are expected to rise for the second consecutive month in January as potential home buyers take advantage of the record drop in home prices however, as household face a weakening labor market paired with fears of a deepening recession, the outlook for the housing sector remains bleak. The S&P/Case-Shiller home price indicator showed a record drop in property values as the index slipped 18.2% in November, which was the sharpest decline since 2001, and conditions are likely to get worse in the months ahead as credit conditions remain far from normal. Increased turmoil in the banking sector continued to weigh on private lending as consumer credit fell another $6.6B in December after falling $11.0B in the previous month, which was the biggest drop since 1943, while a separate report by the Conference Board showed that consumer sentiment slipped to a record low reading of 37.7 from a revised reading of 38.6 in December, and the outlook for future growth remains bleak as the International Monetary Fund forecasts the annual rate of growth to contract 1.6% in 2009. As the world’s largest economy heads into its worst economic slump in over a quarter century, the FOMC said that there is a ‘significant risk that the economic recovery could be delayed and initially quite weak’ as the banking sector remains weak, and expects the economy to contract between 0.5%-1.3% this year as the credit crunch continues to drag on the real economy. Moreover, policy makers stated that the central bank will continue to purchase assets and use unconventional measures ‘that are likely to keep the size of the Federal Reserve’s balance sheet at a high level’ to stimulate the ailing economy, and despite the extraordinary efforts taken on by the MPC, economic activity throughout the region is likely to deteriorate further as households and businesses continue to cutback on spending and investment. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, the U.S. dollar may turn a blind eye to the event risks scheduled for tomorrow as the reserve currency continues to benefit from safe-haven flows.

Expectations for a rise in existing home sales favors a bullish forecast for the greenback, and an inline print or a rise of more than 1.3% in demands would certainly set the stage a short euro-dollar trade for the given event risk. Therefore, with our expectations at hand, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of EURUSD, and once these conditions are met, we will place our initial stop at the nearby swing higher (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, fears of a deepening recession paired with tightening credit conditions could weigh on demands for existing homes, and an unexpected fall in sales favor a bearish outlook for the dollar. As a result, if demands fall 0.2% or more, we will look to short the greenback, and will follow the same strategy for a long euro-dollar trade as the short position listed above, just in reverse.

Published on  Wed, Feb 25 2009, 06:13 GMT