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

Retail spending in the U.S. is widely expected to improve in October, with economists forecasting domestic demands to increase 0.9% from the previous month, and the dollar is likely to face increased volatility following the sales report as investors weigh the prospects for a sustainable recovery.


Trading the News: U.S. Advance Retail Sales

What’s Expected
Time of release: 11/16/2009 13:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 0.9%
Previous: -1.5%

Impact the U.S. retail sales report has had over EURUSD for the past 2 months




September 2009 U.S. Retail Sales

Retail spending in the U.S. slipped 1.5% in September amid expectations for a 2.1% decline, and the data reinforces an improved outlook for future growth as policy makers see the economy emerging from the worst recession since the Great Depression. The breakdown of the report showed discretionary spending on food and beverages increased 0.7% after rising 0.8% in August, with demands for clothing rising for the third month in September, while motor vehicle sales slumped 10.4% to mark the biggest decline since August 2005 following the conclusion of the ‘cash-for-clunker’ incentive. As the expansion in monetary and fiscal policy helps to prop up the economy, policy makers expect the nation to return to growth going into the following year however, as the Fed projects unemployment to hit 10% towards the end of the year, the slump in the labor market could hamper the prospects for a sustainable recovery.



August 2009 U.S. Retail Sales

Sales at U.S. retailers surged in August by the most in three years, led by a jump in auto purchases as consumers took advantage of the government’s “cash-for-clunkers” program.
The 2.7 percent increase exceeded forecasts of 1.9%. Purchases excluding automobiles climbed 1.1 percent, as clothing and electronics saw strong gains as well. Auto sales increased by the most in almost eight years, as buyers traded in older models for new, more fuel-efficient vehicles. The gain in spending was broad-based as 11 of 13 categories registered increases, easing concern that rising unemployment and a record loss of household wealth will cause Americans to retrench. An initial bullish dollar reaction would have kept us on the sidelines as we were expecting the greenback’s correlation to risk to hold which it eventually did leading the EURUSD to trade higher on the day.


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.




How To Trade This Event Risk

Retail spending in the U.S. is widely expected to improve in October, with economists forecasting domestic demands to increase 0.9% from the previous month, and the dollar is likely to face increased volatility following the sales report as investors weigh the prospects for a sustainable recovery. The advanced GDP reading showed the growth rate expanded at an annual pace of 3.5% in the third quarter, with personal consumption advancing 3.4% amid expectations for a 3.1% rise, and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to support the real economy. Moreover, domestic vehicle sales jumped to an annual pace of 7.94M in October from 6.80M in the previous month, with chain-store sales increasing 2.1% during the same period, and the data suggests households are increasing their willingness to spending as the economy emerges from the worst recession since the post-war period. Nevertheless, a report by the Labor Department showed non-farm payrolls tumbled 190K in October after falling 219K in the previous month, leading the annual rate of unemployment to jump to 10.2% from 9.8% in September, and the slump in the labor market foreshadows a dour outlook for private spending as households face weakening demands for employment paired with tightening credit conditions. Consumer credit tumbled 5.8% in August to mark the seventh consecutive monthly decline, while the U. of Michigan confidence survey unexpectedly weakened in November, and households may look to increase their rate of savings over the coming months as policy makers see a risk for a protracted recovery. The Federal Open Market Committee held the benchmark interest rate at 0.25% in November and pledged to maintain borrowing costs at the record-low for “an extended period” and announced it will purchase $1.25T in mortgage-backed securities, along with “about $175B of agency debt” throughout the first three-months of the following year in order to encourage a sustainable recovery. In addition, the central bank said “businesses are still cutting back on fixed investment and staffing, though at a slower pace,” and held a cautious outlook for the housing market as conditions remained “constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.” As a result, the central bank is likely to hold a dovish outlook for price growth going into the following year growth inflation expectations remain “stable,” and investors may continue to scale back expectations for higher interest rates in the U.S. as policy makers aim to restore private-sector spending. Nevertheless, as risk trends continue to drive price action in the currency market, a rise in risk appetite could drive the U.S. dollar lower as the traders move into higher-yielding currencies.

Expectations for a rebound in household spending favors a bullish outlook for the greenback as growth prospects improve, and price action following the sales report could set the stage for a long-dollar trade as the economy emerges from the recession. Therefore, if retail sales rises 0.9% or greater in October, we will look for 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 set our initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, the slump in employment paired with tightening lending standards may continue to weigh on household temperament to spend, and a dismal sales report could weigh on the reserve currency as investors mull over the prospects for a sustainable recovery in the U.S. As a result, if private spending rises 0.4% or less, we will favor a bearish outlook for the dollar, and will follow the same strategy for a long euro-dollar trade as the short position implemented above, just in reverse.