How to Trade the US Advance Retail Sales Announcement

05/13/2009 12:01 am EST

Focus: FOREX

Retail sales in the US are expected to hold flat in April as tax refunds reach consumers, however, the outlook for private spending remains bleak as households continue to face a weakening labor market paired with tightening credit conditions. A report by the Labor Department showed the world's largest economy lost another 539K jobs in April.

Trading the News: US Advance Retail Sales

What's Expected:

Time of release: 05/13/2009 12:30 GMT, 08:30 EST
Primary Pair Impact: EUR/USD
Expected: 0.0%
Previous: -1.2%

Impact US Retail Sales Report Had on EUR/USD for Past Two Months

March 2009 US Retail Sales
US retail sales unexpectedly fell 1.1% in March after rising 0.3% in the previous month, and conditions are likely to get worse as households continue to face a weakening labor market paired with tightening credit conditions. The breakdown of the report showed demand for electronics fell 5.9% during the month, while sales of motor vehicles slumped 2.3%, and receipts at restaurants and bars slipped 1.4% from the previous month to mark the biggest contraction since March 2005. The data foreshadows a dour outlook for the second quarter as private sector spending deteriorates, and businesses may continue to scale back on production and employment as trade conditions falter. As a result, the FOMC pledged to hold the benchmark interest rate at "low levels" for some time in order to stem the downside risks for growth and inflation, and said that price pressures "remain subdued" as a result of the downturn in the global economy.

February 2009 US Retail Sales
Private sector demands in the US fell 0.1% in February after rising 1.8% in the previous month, and the outlook for consumer spending remains bleak as deteriorating fundamentals continue to foreshadow a deepening downturn in the region. A deeper look at the report showed that auto-related purchases fell 4.3% during the month, while gasoline receipts increased 3.4% on the back of higher oil prices, and conditions are likely to get worse as households face a weakening labor market. The economy lost another 651K jobs during the same period, which pushed the jobless rate to 8.1%-the highest since December 1983-and the data continues to reinforce a dour outlook for the labor market as business continue to cut back on production and employment in an effort to reduce costs.

What to Look for Before the Release

MoneyShow.com readers 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 EUR/USD 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 EUR/USD ahead of the data release.

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Retail sales in the US are expected to hold flat in April as tax refunds reach consumers, however, the outlook for private spending remains bleak as households continue to face a weakening labor market paired with tightening credit conditions. A report by the Labor Department showed the world's largest economy lost another 539K jobs in April, which pushed the annual rate of unemployment to its highest level since 1983, while continued claims for jobless benefits reached a record high of 6.3M in the week ending April 18, and conditions are likely to get worse as businesses continue to cut back on production and employment in an effort to reduce their cost structure.

A separate report by the Commerce Department showed orders for durable goods fell 0.8% in March, while factory orders slumped 0.9% during the same period, and fading demands from households and businesses reinforces a weakening outlook for the region as private sector consumption accounts for more than two-thirds of the economy. Moreover, wholesale demands dropped 2.4% from February to its lowest level since 2005, while consumer credit plunged $11.1B in March to mark the biggest drop since 1990, and the Conference Board's leading economic indicator foreshadows a deepening downturn in the region as the index holds at a five-year low of 98.1.

Meanwhile, Fed chairman Ben Bernanke said during a speech earlier this month that the jobless rate could perhaps exceed 10% "For a period" in 2010, and that he expects unemployment to stay at an elevated plane for some time. However, Richmond Fed president Jeffrey Lacker emphasized that he anticipates "The rate of decline in payroll employment to diminish over time," and went on to say that "Some spending components appear to be bottoming out."

Nevertheless, a Bloomberg News survey showed economists are becoming increasingly pessimistic towards the economy as they forecast the annual rate of unemployment to average 9.6% next year and 8.5% in 2011, and expectations for a prolonged contraction in the labor market is likely to weigh on the outlook for household spending as the region faces its worst economic downturn in over half a century. As a result, deteriorating fundamentals paired with a weakening outlook for employment is likely to weigh on the US dollar as growth prospects deteriorate, however, as risk trends continue to drive price action in the foreign exchange market, a drop in market sentiment following a dismal sales report could boost demands for the greenback as the reserve currency benefits from safe-haven flows.

Expectations for a flat retail sales reading could favor a bullish outlook for the greenback as policymakers expect economic activity to stabilize in the second half of the year, however, as the labor conditions falter, we would need an enhanced outlook for private spending in order to take a long dollar trade for the given event risk. Therefore, if consumer spending rises 0.2% or more in April, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of EUR/USD, and once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based 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 demands for employment paired with fears of a deepening downturn is likely to weigh on households, and an unexpected drop in retail sales would lead us to short the dollar as growth prospects falter. As a result, a drop of 0.2% or more in household spending would lead us to hold a bearish outlook for the greenback, and we will follow the same strategy for a long euro/dollar trade as the short position listed above, just in reverse.

By David Song, Currency Analyst, DailyFX.com

 

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