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

Trading the News: US Durable Goods Orders

What’s Expected
Time of release:        02/25/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         1.5%
Previous:         0.3%

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

December 2009 US Durable Goods Orders

Demands for U.S. durable goods increased 0.3% in December , which fell short of expectations for a 2.0% rise, while excluding transportation, orders pushed 0.9% higher and exceeded forecasts for a 0.5% advance. The data suggests that the underlying trend is indeed improving however, the pace of the recovery may be slowed as businesses keep a lid on production and employment. Nevertheless, growth prospects are likely to improve this year as the expansion in monetary and fiscal policy continues to feed through the real economy, and the Fed may look to unwind its emergency measures throughout the first-half of 2010 as the economy emerges from the worst recession since the Great Depression.

November  2009 US Durable Goods Orders

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 raising 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.

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 is likely to face increased volatility over the next 24 hours of trading as economists forecast orders for durable goods to expand 1.5% in January, and a rise in private sector demands are likely to encourage prospects for a sustainable recovery as the expansion in monetary and fiscal policy continues to feed through the real economy. The advanced 4Q GDP reading showed the growth rate increased 5.7% from the previous year to top forecasts for a 4.7% rise, while retail spending rebounded 0.5% in January after slipping a revised 0.1% in the previous month. Moreover, a report by the Institute for Supply Management showed manufacturing expanded at the fastest pace since August 2004, with the index jumping to 58.4 from 55.9 in December, while a separate report showed industrial outputs advanced 0.9% during the same period to mark the seventh consecutive rise. The data reinforces an improved outlook for future growth as policy makers take unprecedented steps to stimulate the ailing economy, and the rebound in consumption may lead the central bank to raise its outlook for the region as private spending remains one of the biggest drivers of growth.

Nevertheless, the Federal Open Market Committee held the benchmark interest rate at the record-low of 0.25% in January 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 meeting minutes showed the MPC expects the ongoing weakness in the labor market to “restrain cost pressures” over the coming months, and discussed the possibility of selling assets in the “near future” as policy makers see a need to reduce the Fed’s balance sheet “substantially over time.” In addition, the FOMC went onto say that managing the discount and federal funds rate “would be a key element” for future policy, and noted that there were a “range of views” on how to withdraw the emergency measures as the economy recovers from the recession. Meanwhile, Fed Chairman Ben Bernanke argued that “a sustained recovery will depend on continued growth” in private-sector demands during his testimony in front of the House Financial Services Committee, but noted that the labor market “remains quite weak” as businesses remain reluctant to expand their labor force. However, MPC member Thomas Hoenig dissented against his colleagues and said that keeping the interest rate at the record-low for an “extend period” period of time was “no longer warranted,” 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, and price action following the release could set the stage for a long dollar trade as growth prospects to improve. Therefore, if demands for durable goods expand 1.5% or greater in January, we would need to see a red, five-minute candle following the data to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance taking volatility into account, and this risk will help to establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to preserve our profits.

In contrast, fears of a protracted recovery paired with tightening credit conditions may continue to weigh on private spending, and a dismal durable goods report could drag on the exchange rate as policy makers hold a cautious outlook for the economy. As a result, if demands expand slower than projected or unexpectedly contract, we will favor a bearish outlook for the greenback, and will utilize the same strategy 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