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EUR/USD: Trading the U.S. Advance Retail Sales Report

EUR/USD: Trading the U.S. Advance Retail Sales Report

2010-05-13 19:15:00
David Song, Currency Strategist
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Trading the News: U.S. Advance Retail Sales

Why Is This Event Important:


As the world’s largest economy recovers from the worst recession since the Great Depression, investors will certainly keep a close eye on private spending as it remains one of the leading drivers of growth. With the Federal Reserve aiming to encourage a sustainable recovery, a seventh consecutive monthly rise in retail sales in likely to encourage an improved outlook for future growth

What’s Expected:

Time of release:        05/14/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.2%
Previous:         1.6%

Will This Be Market Moving (Scenarios):

As employment conditions improve, household spending is expected to increase another 0.2% in April following the 1.6% rise in the previous month, and conditions are likely to pick up going into the second-half of the year as the expansion in monetary and fiscal policy continues to feed through the real economy. The Federal Reserve held an enhanced outlook at its rate decision last month and said that the “labor market is beginning to improve,” but reiterated that the interest rate will stay close to zero for an “extended period” as Chairman Bernanke argues that “a significant amount of time will be required to restore the 8 ½ million jobs that were lost during the past two years.”

The Upside

With non-farm payrolls increasing for the fourth  month in April, households may look to increase their temperament to spend as the rebound in economic activity gathers steam, and expectations for a sustainable recovery could pave the way for a jump in retail sales as consumer confidence advances to the highest level since October 2007.

The Downside

However, as consumers face tightening credit conditions paired with fears of a protracted recovery, the uncertainties surrounding the economy outlook could lead households to keep a lid on spending. As a result, a dismal consumption report could lead the central bank to maintain a dovish stance going into the second-half of the year, which would certainly drag on the exchange rate as investors weigh the prospects for future policy.

How To Trade This Event Risk

Projections for a rise in retail spending favors a bullish outlook for the greenback, and price action following the report could generate a long dollar trade as growth prospects improve. Therefore, if sales increases 0.3% or greater in April, we will need to see a red, five-minute candle following the release to confirm 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 after taking market volatility into account, and this risk will establish our first target. The 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 mark in an effort to lock-in our profits.

In contrast, tightening credit conditions paired with the ongoing slack in the labor market could hamper the rebound in economic activity, and a dismal sales report could weigh on the exchange rate as the likelihood for a sustainable recovery deteriorates. As a result, if spending rises less than 0.2% or unexpectedly contracts from the previous month, we will favor a bearish outlook for the greenback, and will utilize the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

05.13_TTN1

Impact U.S. Advance Retail Sales has had on EUR during the last month

05.13_TTN2

March 2010 U.S. Advance Retail Sales

Retail spending in the world’s largest economy jumped 1.6% in March after expanding a revised  0.4% in the previous month, which topped market expectations for a 1.2% rise. The breakdown of the report showed 11 of the 13 categories increased, with demands for motor vehicle and parts jumping 6.7% to lead the advance, while spending on electronics slumped 1.3% after rising 3.1% in February. The data reinforces an improved outlook for future growth as private sector spending accounts for more than two-thirds of the economy however, Fed Chairman Bernanke continued to see a risk for a protracted recovery as households face the deterioration in the labor market paired with tightening credit conditions. As a result, the FOMC is widely expected to maintain its current policy throughout the first-half of the year, and may support the economy going into the latter part of 2010 as policy makers aim to encourage a sustainable recovery. 05.13_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 EUR 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 EUR 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

Questions? Comments? Join us in the DailyFX Forum

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

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