Trading the News: US Durable Goods Orders

11/26/2008 12:01 am EST

Focus: FOREX

The growth outlook for the US is expected to weaken further, as economists forecast durable goods orders to fall 3.0% in October. Tightening credit conditions paired with falling home prices have certainly dragged on the private sector, as personal spending dropped 3.1% in the third quarter for the first time since 1991.

What's Expected
Time of release:                 11/26/2008 13:30 GMT, 08:30 EST
Primary Pair Impact :          EUR/USD
Expected:                              -3.0%
Previous:                               0.9%

Effect the US Durable Goods Orders Had Over EUR/USD for the Past Three Months

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September 2008 US Durable Goods Orders

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Durable goods orders contracted for the second consecutive month in September, as firms continued to cut back on capital investments. Orders fell 1.1% after plunging 4.1% the previous month, while durables excluding transportation unexpectedly increased 0.8% due to an increase in aircraft demands. Fears of a global recession paired with instability in the financial market has certainly taken a toll on the world's largest economy, and demands may weaken further over the coming months as the major economies around the world teeter on the brink of a recession. Mounting fears of a global meltdown led the Fed to lower the benchmark interest rate by 100bp during the month, and may continue to ease policy further in the months ahead as the US economic growth prospects deteriorate further.

August 2008 US Durable Goods Orders

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Orders for durable goods plunged 4.5% in August, which was far worse than the 1.9% decline projected by economists. In addition, durables excluding transportation fell 3% from the previous month to record its biggest monthly decline since January 2007. The downturn in the financial markets paired with the lack of stability in the credit market led firms to reduce spending, and conditions are likely to get worse over the coming months as demands from the global economy falter. Mounting growth fears have already spurred bets that the FOMC will lower borrowing costs at next month's policy meeting in order to stem further downturns in the economy, which could stoke increased selling pressures for the US dollar over the near term.

July 2008 US Durable Goods Orders

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US durable goods orders increased 1.3% in July for the second straight month, driven by an unexpected rise in export demands. Meanwhile, durables excluding transportation increased 0.7% from the previous month despite expectations for a 0.7% decline. Amid the better-than-expected release, conditions are expected to get worse over the following months as the Fed projects demands from abroad to weaken throughout the second half of the year. Fears of a severe downturn have intensified, as market participants expect the US economy to slip into a recession towards the end of the year, and may lead the FOMC to lower the benchmark interest rate over the near term in order to stave off further downturns in the economy.

How to Trade This Event Risk

The growth outlook for the US is expected to weaken further as economists forecast durable goods orders to fall 3.0% in October. Tightening credit conditions paired with falling home prices have certainly dragged on the private sector, as personal spending dropped 3.1% in the third quarter for the first time since 1991. In addition, retail spending slipped to a record low of -2.8% in October, followed by a 0.9% decline in chain store sales, and conditions may only get worse as the unemployment rate reached a 14-year high of 6.5% during the same period. Fading employment opportunities have clearly taken a toll on demands, as factory orders fell another 2.5% following a 4.3% decline in August, while domestic vehicle sales plunged to 7.9M from 9.6M in September. Deteriorating fundamentals have certainly stoked fears that the world's largest economy could face a deep and prolonged recession that could last well into the next year, and may lead policymakers to increase their efforts over the coming months in order to stave off further downturns in the economy. President-elect Barack Obama promised to deliver a fiscal stimulus package during a speech yesterday as he expects conditions to get worse, and noted that it will be imperative to restore confidence in the financial market. Mr. Obama went on to say that the unprecedented downturn in the financial market requires "extraordinary policy responses," which suggests that he will work closely with future Treasury secretary Timothy Geithner to carry out these fiscal objectives. Meanwhile, Fed fund futures are showing that market participants are increasing their bets for a 50bp rate cut as they price in an 88% chance for the FOMC to lower the benchmark interest rate to 0.50%, however, a Bloomberg News survey shows a median forecast for a 25bp cut to 0.75%, which suggests that the US dollar may face increased selling pressures over the coming months as the Fed continues to lower borrowing costs. Nevertheless, as risk trends continues to drive price action in the currency market, the greenback may continue to benefit from its safe haven status as investors curb their appetite for risk.

With the given event risk at hand, we would need to see a considerable improvement from the forecast to go long on the dollar. Therefore, an increase of at least 0.1% or more would certainly set the stage for a short EUR/USD trade. Following the release, we will look for a red, five-minute candle to confirm an entry on two lots of the euro-dollar. Our initial stop will be placed at the nearby swing high (or reasonable distance), and this level of risk will determine the target for the first lot. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to break even once the first trade reaches its target.

On the other hand, fading employment opportunities paired with the lack of stability in the credit market is likely to curb demands, and a fall in durable goods would certainly stoke increased selling pressures for the greenback. As a result, a decline of 3.0% or greater in orders would favor a bearish dollar trade (long EUR/USD), and we will follow the same strategy as the bullish dollar trade listed above, just in reverse.

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By David Song, currency analyst for DailyFX.com

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