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EUR/USD: Trading the U.S. Durable Goods Orders Report

Wed, Feb 25 2009, 11:48 GMT
by Daily FX Research Team

DailyFX

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast durable goods orders to contract another 2.5% in January as private-sector spending falters. Fading demands from home and abroad paired with fears of a deepening recession has certainly dragged on businesses throughout the region

Trading the News: US Durable Goods Orders

What’s Expected

Time of release: 02/26/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -2.5%

Previous: -2.6%

Effects of US Durable Goods Orders on EURUSD for the past 2 months

December 2008 US Durable Goods Orders

Business spending in the U.S. fell for the fifth month in December as durable goods orders slipped another 2.6% to mark its worst slump since 1992. The breakdown of the report showed that demands for capital goods fell 1.1% during the month after falling 3.2% in November, while orders for transport equipment rose 0.6% after falling 9.8% in the previous month. The data continues to reinforce a dour outlook for the world’s largest economy as private-demands falter, and as global trade conditions falter, economic activity throughout the region is likely to deteriorate further as firms continue to cutback on production and employment in an effort to reduce costs. Nevertheless, as signs of a deepening recession emerge, the Fed is likely to hold the benchmark interest rate at the record low for some time, and is may adopt unconventional measures over the coming months in order to simulate the ailing economy.

November 2008 US Durable Goods Orders

Private-sector demands weakened at a slower pace in November as orders for durable goods fell 1.0% amid expectations for a 3.0% decline. Despite the enhanced reading for November, last month’s reading was revised down to -8.4% from an initial reading of -6.2%, which marked the biggest drop in capital spending in eight years. As credit conditions remain far from normal, business spending is likely to remain subdued over the coming months, and conditions may only get worse as the economy faces its worst recession in over a quarter century. As a result, the Fed took unprecedented steps to stimulate the slowing economy as they cut the benchmark interest rate to a target range of zero to 0.25%, which is the lowest level in the central bank’s history. As the FOMC implements a zero interest rate policy (ZIRP), Fed Chairman Ben Bernanke and Co. are likely to adopt quantitative easing in an effort to steer the world’s largest economy out of a recession.

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

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast durable goods orders to contract another 2.5% in January as private-sector spending falters. Fading demands from home and abroad paired with fears of a deepening recession has certainly dragged on businesses throughout the region, and the outlook for future growth remains bleak as firms continue to cutback on production and employment in an effort to reduce costs. As a result of the cost-cutting measures instituted by businesses across the country, industrial production fell to a five-year low in January as outputs dropped 1.8% during the month after posting a 2.4% decline in December, while chain-store sales slipped another 1.6% during the same period after falling 2.0% in the previous month. In addition, factory orders dropped 3.9% in December, which was followed by a 6.5% contraction in the prior month, and the data continues to reinforce expectations that the world’s largest economy will face a deepening recession as growth prospects deteriorate at a rapid pace. Moreover, mounting growth fears paired with increased turmoil in the banking sector continued to drag on the real economy as private-lending practices remain far from normal, and conditions are likely to get worse in the months ahead as households turn increasingly pessimistic towards the economy. Furthermore, the advanced GDP reading for the fourth quarter showed that the economy contracted the most since 1982 as personal consumption slipped 3.5% from the previous quarter, and the likelihood for improved growth remains bleak as the Fed sees a ‘significant risk that the economic recovery could be delayed and initially quite weak’ as the financial sector remains under pressure. The central bank went onto say that policy makers expects the economy to contract between 0.5%-1.3% this year as the credit crunch continues to drag on the real economy, and despite the extraordinary efforts taken on by the government, economic activity is likely to deteriorate further as households and businesses continue to cutback on spending and investment. Nevertheless, as investors remain risk adverse, the greenback could strengthen against its currency counterparts following the event as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk clearly favors a bearish forecast for the U.S. dollar as private demands falter however, the unexpected rise in retail spending has left the door open for an upward surprise, and an enhanced durable goods report would certainly set the stage for a bullish dollar trade following the release. Therefore, if orders fall less than expected (contracts 1.5% or less), we will look for a red, five-minute candle following the event 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 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 trade reaches its target.

Conversely, as households and businesses face a deepening recession, demands for durable goods are likely to weaken further, and an inline print or a drop of more than 2.5% would favor a bearish outlook for the greenback. As a result, a dismal reading would lead us to short the dollar, and we will follow the same setup for a long euro-dollar position as the short trade listed above, just in reverse.

Published on  Wed, Feb 25 2009, 11:59 GMT