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

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

2010-05-25 19:54:00
David Song, Currency Strategist
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Trading the News: U.S. Durable Goods Orders

Why Is This Event Important:


As U.S. policy makers aim to encourage a sustainable recovery in the world’s largest economy, a rebound in demands for durable goods could drive the dollar higher as private sector spending remains one of the leading drivers of growth. With the economic outlook improving, the recent developments could lead the Federal Reserve to normalize policy further in the second-half of the year as the recovery gathers pace.

What’s Expected:
Time of release:        05/26/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         1.3%
Previous:         -1.3%

Will This Be Market Moving (Scenarios):


Orders for U.S. durable goods are forecasted to rise 1.3% in April after unexpectedly contracting 1.3% in the previous month, while demands excluding transports are projected to increase another 0.5% after expanding 2.8% in March, which was the fastest pace of growth since December 2007. As growth prospects improve, the data is likely to spark increased volatility in the exchange rate, and the rise in private sector consumption could spur speculation for a rate hike later this year as central bank anticipates the recovery to “strengthen gradually over time.” However, as risk trends continue to dictate price action in the currency market, the ongoing deterioration in market sentiment could produce mixed reactions following the release as investors scale back their appetite for risk.

The Upside

As labor conditions improve, with manufacturing leading the rebound in economic activity, household and businesses may show a greater willingness to spend as the nation emerges from the worst recession since the Great Depression. As a result, a larger-than-expected rise in private sector demands is likely to encourage the prospects for a sustainable recovery, which should lead to a bullish reaction in the greenback the economic outlook improves.

The Downside

However, as the  first-quarter GDP reading failed to meet market expectations, with the central bank maintaining a cautious outlook for economy, households and businesses may keep a lid on consumption as policy makers see a risk for a protracted recovery. If the data disappoints, the weakness in private spending is likely to drag on the outlook for future growth, which could lead the Federal Reserve to maintain a loose policy stance throughout the second-half of the year.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the greenback as market  participants anticipate private sector consumption to increase further in April, and price action following the release could set the stage for a long dollar trade as growth prospects improve. Therefore, if demands for durable goods advance 1.3% or greater from the previous month, we will need to see a red, five-minute candle following the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, 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 generate our first objective. The second target 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 order to preserve our profits.

In contrast, households and businesses may lower their temperament to spending as the central bank continues to see substantial slack within the real economy, and a dismal durable goods report could weigh on the exchange rate as the outlook for a sustainable recovery deteriorate. As a result, if orders expand less than 0.6% or unexpectedly contract from the previous month, we will favor a bearish outlook for the greenback and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

05.25_TTN1

Impact U.S. Durable Goods Orders has had on USD during the last month

05.25_TTN2

March 2010 U.S. Durable Goods Orders

Orders for U.S. durable goods unexpectedly slipped 1.3% in March, led by at 67% drop in demands for nondefense aircrafts, while bookings excluding transports jumped 2.8% to mark the fastest pace of growth since December 2007. A deeper look at the report showed shipments increased 1.2% to mark the first rise this year, while inventories advanced for the third month in March, and conditions are likely to improve going forward as the government maintains a loose policy stance in order to encourage a sustainable recovery. As Fed Chairman Ben Bernanke holds a dovish outlook and expects the ongoing slack in the private sector to drag on inflation, the MPC is widely anticipated to hold the benchmark interest rate near zero going into the second-half of the year as the central bank aims to balance the risks for the economy. 05.25_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

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

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