EUR/USD: Trading the Durable Goods Report

Trading the News: US Durable Goods Orders

What’s Expected
Time of release:        11/25/2009 12:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.5%
Previous:         1.0%

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

Sep 2009 US Durable Goods Orders U.S. durable goods orders rose 1.0% in September which was in line with expectations and the fourth increase in the last six months. A 7.9% surge in machinery offset declines in non-defense aircrafts and electronics. Following the prior month’s sharp decline the result failed to inspire optimism. Markets were already becoming increasingly pessimistic as concerns were growing that growth would be hard to come by once government stimulus evaporated. Therefore, the improvement in demand failed to generate any price reaction leaving us on the sidelines. The prevailing bearish sentiment would ultimate lead the EUR/USD pair lower on the day.  Aug 2009 US Durable Goods Orders Demands for U.S. durable goods plunged 2.4% in August, driven by a 44.2% drop in commercial aircrafts. Estimates were for a 0.4% increase as a stabilizing financial sector and increasing demand from abroad was expected to continue the improving trend. A 1.8% drop in capital goods was discouraging as the uncertainty over the scope of the recovery has put investment in new plants and equipment on hold . The bullish dollar reaction to the news was quickly retraced leaving us on the sidelines. The greenback would spend the day consolidating following the prior day’s volatility.

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:

How To Trade This Event Risk

U.S. durable goods orders are expected to improve for a second month with demand increasing by 0.5% following a 1.0% improvement the month prior. The current positive trend in demand for long lasting goods bodes well for sustainable growth as continued investment is a sign of improving optimism which will eventually lead to an increase in hiring. Meanwhile, unemployment at 10.2% should remain a drag on the economy as more out of work Americans will most likely lead to a disappointing Holiday shopping season. However, crossing the wires at the same time as the durable goods report will be personal income and spending figures, with early forecasts calling for an improvement of 0.2% and 0.6% respectively. Initial jobless claims, the personal consumption expenditure reading, University of Michigan consumer confidence and new home sales are also on tap helping to clear up the consumer spending picture. Despite the slew of data we could see a muted reaction with the Thanksgiving Holiday the following day. The expected low volume environment will provide the potential for small breakouts but may lack the ability to generate sustainable trends.

An improving consumption picture could raise the outlook for growth, inflation and interest rates which would be a bullish dollar scenario. However, given the recent trend of a negative greenback reaction to positive data fundamental data as it maintains its negative correlation to risk appetite. Therefore, if demands for durable goods rise 0.5% or more during the month with a corresponding improvement in the other consumption gauges, we will look for a green, five-minute candle following the release to confirm a buy entry on two lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing low, 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 preserve our profits.

Conversely, signs that demand is peaking will only reinforce the pessimistic view that growth isn’t sustainable without a reemergence from the consumer as government aide dissipates.  As a result, demands fall 0.2% or greater in October, we will favor a bullish outlook for the greenback, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.