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

By , Currency Analyst
27 January 2010 19:47 GMT

Trading the News: US Durable Goods Orders

What’s Expected
Time of release:        01/28/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         2.0%
Previous:         0.2%

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

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November 2009 US Durable Goods Orders

Demands for U.S. durable goods increased 0.2% in November, which fell short of expectations for a 0.5% rise, while excluding transportation, orders jumped 2.0% amid forecasts for a monthly increase of1.1%. A deeper look at the report showed new orders increased 0.2% after contracting 0.6% in October, with shipments rising 0.3%, while transportation tumbled 5.5% to taper the advance in the index. The data suggests businesses are rising their willingness to spend as the economy emerges from the worst recession since the Great Depression, and conditions are likely to improve going forward as policy makers aim to encourage a sustainable recovery. 01.27_TTN2

October  2009 US Durable Goods Orders

U.S. durable goods orders tumbled 0.6% in October after rising a revised 2.0% in the previous month amid economists’ expectations for a 0.5% rise, raising fears that the economic recovery will be slow to gain speed. Meanwhile, the breakdown of the report showed orders for defense bookings rose 0.4% to taper the decline, while excluding transportation equipment, orders fell 1.3%, posting the largest decline since March. The data reinforces a weakened outlook for the world’s largest economy as policy makers continue to see a risk for a protracted recovery, and the Fed is widely anticipated to maintain its current policy going into the following year in order to encourage a sustainable recovery. 01.27_TTN3

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.
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How To Trade This Event Risk

Demands for U.S. durable goods are projected to increase 2.0% in December after rising 0.2% in the previous month, and the data is likely to encourage an improved outlook for future growth as private-sector consumption accounts for more than two-thirds of the economy. A report by the Commerce Department showed factory orders increased 1.1% in November, which more than doubled expectations for a 0.5% rise, while the ISM Manufacturing index jumped to 55.9 in December from 53.6 in the previous month to mark the highest reading since April 2006. Moreover, chain-store sales increased 2.8% during the same period, while business inventories expanded 0.4% for the second consecutive month in November, which is the first back-to-back rise since the third-quarter of 2008, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, retail spending unexpectedly fell 0.3% in December, while consumer credit tumbled $17.5B in November to mark the biggest decline since recordkeeping began in 1943, and the ongoing weakness in the labor market paired with tightening credit conditions may continue to drag on economic activity as policy makers see a risk for a protracted recovery. The Fed’s Beige Book said economic activity improved in 10 of the 12 districts, with home sales increasing in most region, but went onto say that the labor market “remained soft,” which continued to put downward pressures on wage growth. In addition, the central bank noted that households remained “cautious, price sensitive, and focused on necessities, but sometimes willing to spend on discretionary purchases,” and stated demands for borrowing “continued to decline or remained weak” in most districts. Nevertheless, the FOMC held the benchmark interest rate at the record-low of 0.25% this month, and reiterated that borrowing costs will stay low for an “extended period” of time as the central bank aims to encourage a sustainable recovery. The Fed stated economic conditions continued to improve from its previous meeting in December and noted that the deterioration in the labor market appears to be “abating,” but expects to see a “moderate” recovery for some time. However, MPC member Thomas Hoenig dissented against the statement to keep the interest rate at the record-low for an “extend period,” and the central bank may turn increasingly hawkish over the coming months as the recovery continues to gather momentum.

Trading the given event risk favors a bullish outlook for the greenback as economists forecast demands for U.S. durable goods to increase for the second consecutive month in December, and price action following the release could set the a long dollar trade. Therefore, if orders increase 2.0% or greater, we will need to see a red, five-minute candle following the data to confirm a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, 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 its target in order to preserve our profits.

On the other hand, fears of a protracted recovery may lead households and businesses to keep a lid on spending, and a dismal release could drag on the exchange rate as investors weigh the outlook for future growth. As a result, if demands increase 1.0% or less, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position cited above, just in reverse.

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Questions? Comments? Join us in the DailyFX Forum

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

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27 January 2010 19:47 GMT