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

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

2010-03-23 19:23:00
David Song;Michael Wright,
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Trading the News: US Durable Goods Orders

What’s Expected

Time of release:        03/24/2010 12:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.6%
Previous:         3.0%

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

03.23_TTN1

January 2010 US Durable Goods Orders

U.S. durable goods orders increased 3.0% in January, which topped expectations for a 1.5% rise, while demands excluding transportation unexpectedly slipped 0.6%, marking the largest decline since August. The breakdown of the report showed orders for motor vehicles and parts dived 2.2% in January following a 5.5% gain in the previous month, with bookings for non-defense capital goods excluding aircrafts weakening 1.5%, while demands for machinery plunged 9.7%. As the private sector remains weak, the Federal Reserve is widely expected to keep the benchmark interest rate at 0.25% in an effort to encourage a sustainable recovery, and central bank is likely to maintain its pledge to hold borrowing costs at the record-low for an “extended” period of time as policy makers aim to balance the risks for growth and inflation. 03.23_TTN2

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 business 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. 03.23_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.
00001_EUR 00002_EUR

How To Trade This Event Risk

Demands for U.S. durable goods are expected to increase 0.6% in February following the 3.0% expansion in the previous month, and the data is likely to encourage an improved outlook for the world’s largest economy as the recovery gathers momentum. However, the preliminary 4Q GDP report showed private spending advanced 1.7%, which fell short of expectations for a 2.0% rise, while disposable incomes slumped 0.4% in January to mark the biggest decline since July. Nevertheless, retail sales unexpectedly increased 0.3% in February, with consumer credit advancing for the first time in a year, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. The Fed’s Beige Book release earlier this month said economic conditions in nine of the twelve districts improved, with household consumption increasing “slightly” in most regions, while the central bank saw “minimal” wage growth paired with “weak” demands for borrowing.

As a result, the Federal Open Market Committee kept the benchmark interest rate at the record-low in March and reiterated its pledge to hold borrowing costs “exceptionally low” for an “extended period” as the central bank aims “to promote economic recovery and price stability.” In addition, the central bank continued to express concerns about the deterioration in the labor market as “employers remain reluctant to add to payrolls,” and expects inflation to remain “subdued for some time” as Fed Chairman Bernanke expects to see a “nascent” recovery this year. Meanwhile, the MPC noted that the “Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis,” and the central bank is widely expected to normalize policy throughout the year as the outlook for growth and inflation improves. Moreover, Chicago Fed President Charles Evans said that the FOMC is likely to maintain an “accommodative” policy stance over “the next three or four meetings” in order to support the real economy, and the MPC may hold a dovish tone going into the second-half of the year as the private sector remains weak.

Expectations for a 0.6% rise in orders for durable goods favor a bullish outlook for the greenback , and price action following the release could certainly set the stage for a long U.S. dollar trade. Therefore, if the data crosses the wires in-line or better-than-expected, we will need to a see a red, five-minute candle following the event to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to preserve our profits.

On the other hand,  fears of a protracted recovery may lead household and businesses to keep a lid on spending, and a drop in private consumption could weigh on the exchange rate as it accounts for more than two-thirds of the economy. As a result, if orders expand 0.2% or less, we will favor a bearish outlook for the greenback, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

03.23_TTN4

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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