trading news reports

EUR/USD: Trading the US Advance Retail Sales Report

Tuesday, 13 January 2009 10:09:21 GMT  |  David Song, Currency Analyst

Retail spending in the U.S. is expected to fall another 1.2% in December following the 1.8% contraction the previous month, and is likely to weigh on the greenback as the growth outlook for the world’s largest economy remains bleak. The final GDP reading for the third quarter showed that personal consumption dropped the most in over two decades as private-spending slipped 3.8% from the previous quarter.

Trading the News: U.S. Advance Retail Sales

What’s Expected

Time of release:                  01/14/2009 13:30 GMT, 08:30 EST

Primary Pair Impact :          EURUSD

Expected:                              -1.2%

Previous:                               -1.8%

Effect the U.S. retail sales report had over EURUSD for the last 3 months

November 2008 U.S. Retail Sales

Retail sales in the U.S. recorded its worst slump since recordkeeping began in 1992 as demands weakened for the fifth consecutive month. Spending plunged 1.8% during November amid expectations for a 2.0% decline, and conditions are likely to get worse as the labor market deteriorates at a record pace. The breakdown of the report showed that gas sales fell at a record pace during the month as receipts slipped 14.7% from October, while demands for automobiles fell another 2.8% following the 5.5% drop in the previous month. The data continues to reflect a dour outlook for growth as the world’s largest economy faces its longest recession in over a quarter century, and may lead policymakers to increase their efforts over the coming months in order to avoid a deep and prolonged recession.

 

October 2008 U.S. Retail Sales

Consumer spending in the U.S. fell at a record pace in October as retail sales plunged 2.8% from the previous month despite expectations for a 1.2% decline. Sales excluding the volatile automotive component slipped 2.2% during the month, which continues to reflect a dour outlook for the world’s largest economy. Meanwhile, the breakdown of the report showed that gasoline sales slumped 12.7% from the previous month, which was followed by a 2.5% decline in furniture sales. Economic activity is likely to weaken further as private-sector consumption is one of the biggest drivers of growth, which could lead the Fed to ease policy further over the coming months as policymakers carryout their dual mandate to ensure price stability while fostering economic growth.

 

September 2008 U.S. Retail Sales

Private-sector spending in the U.S. fell for the third consecutive month in September for the first time since recordkeeping began in 1992 as retail sales plunged 1.2% from the previous month. Fading employment opportunities paired with falling home prices have clearly taken a toll on consumers, and consumers may cutback on spending even further as fears of a global recession intensify. The downturn in consumption has become a growing as private-sector consumption accounts for more than two-thirds of GDP, which suggests that conditions may only get worse before they improve. Meanwhile, the proactive Fed increased their efforts in order to stave off further downturns in the economy as they lowered the benchmark interest rate by 50bp to 1.00%, and could be forced to reduce borrowing costs even further as growth prospects deteriorate.

How To Trade This Event Risk

 

Retail spending in the U.S. is expected to fall another 1.2% in December following the 1.8% contraction the previous month, and is likely to weigh on the greenback as the growth outlook for the world’s largest economy remains bleak. The final GDP reading for the third quarter showed that personal consumption dropped the most in over two decades as private-spending slipped 3.8% from the previous quarter, and conditions are likely to get worse as the labor market deteriorates at a record pace. U.S. non-farm payrolls fell another 524K in December, which raised the 2008 total to 2.58M, and marked the worst slump in the labor market since the end of World War II in 1945. As a result, the annual rate of unemployment pushed to a 15-year high of 7.2% from a revised reading of 6.8% in November, and the downturn in employment is likely to continue as economic activity falters. Meanwhile, durable goods orders fell 1.8% in November after contracting 8.5% in the previous month, while factory orders slipped 4.6% during the same period, which continues to reflect a dour outlook for the economy. Deteriorating fundamentals have certainly heightened the downside risks for growth and inflation, which could lead the FOMC to step up their efforts as policymakers maintain their dual mandate to ensure price stability while fostering economy growth. The Fed Minutes for December said that the central bank saw ‘a distinct possibility of a prolonged contraction’ as credit conditions remain far from normal, and went onto say that they expect economic activity to ‘fall much more sharply’ during the first half of the year than initially expected. The significant downturn in the economy will likely put pressure on Bernanke and Co. to hold the benchmark interest rate at the record low over the near-term, which could drag on the U.S. dollar going forward. Furthermore, as President-elect Barak Obama pushes for an $800B stimulus package and plans to create or save 3-4M jobs over the next two-years, the extraordinary efforts taken on by the Obama Administration will certainly help to soften the landing of the economy, but as policymakers expect economic conditions to deteriorate further throughout the first half of the year, the commitment taken on by the new Administration may have little or almost no impact on the real economy in 2009.

 

Trading the given event risk may not be as clear cut as some of our previous trades as market participants expect domestic demands to weaken further, but nevertheless,  expectations for a 1.2% decline in spending leaves the door open for an upward surprise. Therefore, we will need a considerable improvement in the retail sector ( a drop of less than 0.5%) to set the stage for a long dollar trade, and with our expectations in hand, we will look for a red, five-minute candle following the release to confirm a short trade on two lots of EURUSD. Once these conditions are met, we will then 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 half of the trade reaches its target.

 

On the other hand,  retail sales in the U.S. is likely to weaken further as consumers continue to face mounting job losses paired with financial uncertainties. As a result, a contraction of 1.8% or greater would favor a bearish forecast for the greenback, and we will follow the same setup for a long EURUSD trade as the short position listed above, just in reverse.

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