The U.S. dollar may continue to strengthen against its currency counterparts as economists forecast the U. of Michigan consumer confidence index to increase to 60.1 from 59.0 in December on the back of falling energy costs.
Trading the News: U. of Michigan Consumer Confidence Survey
What’s Expected
Time of release:01/16/2009 15:00 GMT, 10:00 EST
Primary Pair Impact :EURUSD
Expected: 59.0
Previous: 60.1
Impact of the U. of Michigan Confidence on EURUSD over the last 3 months
December 2008 U. of Michigan Confidence
The preliminary reading for the U. of Michigan confidence report showed a rise in consumers sentiment as the index rose to 59.1 from a final reading of 55.3 in November. Despite the minor improvement, the breakdown of the report showed that consumers remain downbeat towards the economy as the economic outlook slipped to 52.4 from 53.9, while the outlook for inflation fell to 1.7% from 2.9% in the previous month. Fading demands from home and abroad will likely weigh on businesses throughout the first half of 2009, but as President-elect Barack Obama plans to create or save 3M jobs and will shore up a $850B to simulate the economy, efforts by the Obama administration could help to pull the economy out of a recession. However, as credit conditions remain far from normal, economic activity is likely to weaken further during the first quarter of 2009.
November 2008 U. of Michigan Confidence
Consumer sentiment in the U.S. unexpectedly ticked higher to 57.9 from 57.6 in October, but remains near a 28-year low as the world’s largest economy faces its longest recession in over a quarter century. A deeper look into the report showed that the economic outlooks slipped to 55.7 from 57.0, which suggests that domestic demands will deteriorate further as consumers expect conditions to get worse over the next six-months. As private-sector spending is anticipated to weaken further, firms may continue to cutback on employment and production in order to combat the slowdown in the economy, and may lead policy makers to increase their efforts as the growth outlook turns increasingly bleak. Financial uncertainties paired with mounting growth fears had certainly dragged on growth throughout the second half of the year, and may lead the Federal Reserve to adopt a zero-interest rate policy as growth prospects deteriorate at a record pace.
October 2008 U. of Michigan Confidence
The preliminary U. of Michigan report for October showed a record drop in consumer confidence as the index slipped to a 28-year low of 57.5 from 70.3 in the previous month. Mounting growth fears paired with financial uncertainties have certainly taken a toll on the economy, and conditions are likely to get worse as credit conditions remain far from normal. The breakdown of the report showed that the economic outlook held by consumers also slipped to a record low of 56.7 from 67.2, and conditions are likely to get worse as the housing market remains under pressure. Weakening fundamentals paired with the drastic slowdown in the global economy may lead policy makers to step up their efforts in order to avoid a deep and severe recession, and may lead the FOMC to lower the benchmark interest rate further as the central bank struggles to keep the economy afloat.
How To Trade This Event Risk
The U.S. dollar may continue to strengthen against its currency counterparts as economists forecast the U. of Michigan consumer confidence index to increase to 60.1 from 59.0 in December on the back of falling energy costs. Oil prices have fallen considerably after peaking to a high of $147 a barrel in July of 2008, and as crude holds below $40, lower gas prices will certainly help consumers to deal with the downturn in the economy. Despite expectations for a rise in confidence, the growth outlook for the world’s largest economy remains bleak as domestic demands falter while the unemployment rate continues to push higher. Retail spending in the U.S. fell for the sixth consecutive month in December, which is the worse slump since records began in 1992, while durable goods orders slipped another 1.0% during November after falling 8.5% in the previous month. As a result, Fortune 500 firms are lowering their earnings forecast for 2009, and conditions are likely to get worse as the labor market deteriorates at a record pace. The economy shed 2.58M jobs in 2008, which is the biggest drop in employment since the end of WorldWar II in 1945, and pushed the jobless rate to a 15-year high of 7.2% from a revised reading of 6.8% in November. Meanwhile, the Fed’s Beige Book noted that ‘overall economic activity continued to weaken’ across the States, and went onto say that that ‘sales during the holiday season were generally negative’ and expects ‘continued weakness’ in the retail sector. The comments by the central bank suggests that economic activity will remain subdued throughout the first quarter as private-sector consumption, which accounts for more than two-thirds of the economy, is expected to weaken further, and may lead policy makers to increase their efforts as the economy faces its longest recession in over a quarter century. However, as investors remain risk adverse, the U.S. dollar is likely to benefit from its safe haven status as financial uncertainties linger.
As market participants price-in a rise in the U. of Michigan confidence index, we would need also need to see a significant rebound in the economic outlook before we consider a long dollar trade for the given event risk. As a result, if the headline reading rises above 60.0 and the outlook snaps back above 55.0, we will we will look for a red, five-minute candle following the release to confirm a short entry (long dollar) on two lots of EURUSD. We will then place our initial stop at the nearby swing low (or reasonable distance depending on volatility), and this risk will determine out first target. Our second target will be based purely on our discretion, and in order to preserve our profits, we will move the second lot to breakeven once the first trade reaches its target.
On the other hand, mounting job losses paired with financial fears could weigh on consumers, and a dismal confidence reading could weigh on the greenback as the growth outlook turns increasingly bleak. As a result, if the index falls back towards the 28-year low of 57.5, we will certainly short the greenback, and will follow the same strategy as the long dollar trade listed above, just in reverse.
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