EUR/USD: Trading the U.S. Retail Sales Report

Trading the News: U.S. Advanced Retail Sales

What’s Expected
Time of release:        12/11/2009 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.6%
Previous:         1.4%

Impact the U.S. retail sales report has had over EURUSD for the past 2 months

October 2009 U.S. Retail Sales

U.S. retail sales jumped 1.4% in October to top forecasts for a 0.9% rise in private spending, and conditions are likely to improve going into the following year as the expansion in monetary and fiscal policy continues to feed through the real economy. A deeper look at the report showed demands for motor vehicles increased 4.7% after tumbling 14.3% in September, with discretionary spending on food and beverages rising 0.1%, while clothing sales adding another 0.4% to mark the fourth consecutive monthly advance. The data encourages an improved outlook for future growth as the economy emerges from the worst recession since the Great Depression however, as the government stimulus begins to taper off, households may keep a lid on spending as they continue to face a weakening labor market paired with tightened lending standards.

September 2009 U.S. Retail Sales

Retail spending in the U.S. slipped 1.5% in September amid expectations for a 2.1% decline, and the data reinforces an improved outlook for future growth as policy makers see the economy emerging from the worst recession since the Great Depression. The breakdown of the report showed discretionary spending on food and beverages increased 0.7% after rising 0.8% in August, with demands for clothing rising for the third month in September, while motor vehicle sales slumped 10.4% to mark the biggest decline since August 2005 following the conclusion of the ‘cash-for-clunker’ incentive. As the expansion in monetary and fiscal policy helps to prop up the economy, policy makers expect the nation to return to growth going into the following year however, as  the Fed projects unemployment to hit 10% towards the end of the year, the slump in the labor market could hamper the prospects for a sustainable recovery.

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

Retail spending in the U.S. is expected to improve for the second consecutive month in November, with economists forecasting sales to increase 0.6%, and the data is likely to encourage an improved outlook for future growth as the economy emerges from the worst recession since the Great Depression. The preliminary GDP reading showed the growth rate expanded at an annual pace of 2.8% in the third quarter, with personal consumption increasing 2.9% from the three-months through June, and conditions are likely to improve going into the follow year as the expansion in monetary and fiscal policy feeds through the real economy. At the same time, personal incomes grew at an annual rate of 0.2% for the second consecutive month in October amid expectations for a flat reading, with spending increasing 0.7% during the same period to top forecasts for a 0.5% rise, while the jobless rate unexpectedly slipped to 10.0%in November from a 26-year high of 10.2% in the previous month. Moreover, domestic vehicle sales jumped to an annualized pace of 8.36M in November, while the Fed’s Beige Book noted economic conditions have “improved modestly,” and went onto say that consumer spending “picked up modestly” across the 12 districts even as credit standards remained tight. However, Fed Chairman Bernanke held  a cautious outlook for the economy earlier this week and said the nation faces “formidable headwinds” as the households face fading demands for employment paired with tightening credit conditions during a speech to the Economic Club of Washington, and expects price pressures to remain “subdued” over the near-term as policy makers expect to see a “moderate” recovery. Furthermore, the central bank head said that the economy still has “some way to go before we can be assured that the recovery will be self-sustaining,” with former Fed Chairman Paul Volcker stating that “the recovery is still vulnerable and dependent on fiscal stimulus measures.” As a result, market participants anticipate the Federal Reserve to hold the benchmark interest rate at the record-low throughout the first-half of the following year as policy makers see a risk for a protracted recovery, and the central bank may ease policy further over the coming months in order to encourage a sustainable recovery. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, a rise in risk appetite could weigh on the U.S. dollar as the greenback remains the most popular funding-currency next to the Japanese Yen.

Forecasts for a rise in household spending favors a bullish outlook for the greenback as the economy emerges from the recession, and price action following the sales report could set the stage for a long dollar trade as growth prospects improve. Therefore, if retail sales rises 0.6% or greater in November, we will look for a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. One these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance, 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 the target in order to preserve our profits.

In contrast, the slump in the labor market paired with tightening credit conditions may lead households to ramp up their rate of savings and curb their temperament to spending as policy makers see a risk for a protracted recovery, and a dismal sales report could weigh on the exchange rate as investors mull over the prospects for a sustainable recovery. As a result, if sales grows 0.2% or less from the previous month, we will favor a bearish outlook for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com