Economic activity in the third quarter fell less than expected as the advanced GDP reading showed that the economy contracted 0.3% amid expectations for a 0.5% decline. The breakdown of the report showed that personal consumption slipped 3.1% from the previous quarter, which foreshadows a dour outlook for growth as private spending accounts for nearly two-thirds of the economy. As growth prospects deteriorates at a rapid pace, the U.S. economy may face its longest recession in over a quarter century, and may lead the FOMC to ease policy further in an effort to avoid a deep and severe downturn in the economy. Despite the enhanced reading for growth, the outlook remains bleak as credit conditions remain far from normal, and consumers are likely to curb spending in the months ahead as they continue to face falling home prices paired with financial uncertainties
The advanced GDP reading for the second quarter showed that the U.S. economy grew at an annual pace of 1.9%, which crossed the wires slightly weaker than the initial estimate of 2.3% projected by economists. The data shows that the fiscal stimulus plan has certainly helped to stave off a downturn in the economy, but conditions may only get worse as the effects of the rebate checks wears off. Meanwhile, a separate report showed that jobless claims surged to a five year high during July, indicating that higher input costs are forcing firms to cutback on employment. As employment opportunities wane, private-sector spending may weaken throughout the second half of the year as higher inflation continues to sap purchasing power for consumers.
1Q 2008 U.S. Gross Domestic Product
Growth in the U.S. expanded 0.6% dispelling belief that the country was already in a recession. Although subtracting the build up in inventories the first quarter would have contracted. A 26.7% decline in investment in residential property demonstrates that the housing slump in the U.S. has continued and the economy recovery may dependent ion the stabilizing of the sector. Also, durable goods orders fell 6.1% as a weak dollar has failed to generate enough increased demand from overseas to offset the weakness domestically. However, the news was overshadowed by a pending FOMC rate decision. Therefore, we wouldn't have traded the release as we were focused on the larger event risk. The central bank would cut rates by 25 bps as they tried to prevent the economy from slipping into a recession.
How To Trade This Event Risk
The advanced GDP reading for the U.S. is expected to show a 5.5% contraction in fourth quarter, which would be the biggest decline since 1982, and would certainly stoke increased selling pressures for the greenback as the world's largest economy faces its longest recession since the Great Depression. Moreover, personal consumption is expected to drop another 3.5% after falling 3.8% in the previous quarter, which would mark the worse slump in private spending since record keeping began in 1947. Instability in the credit market paired with financial uncertainties have certainly taken a toll on the real economy, and conditions are likely to get worse as the labor market deteriorates at a record pace. The world's largest economy lost 2.58M jobs in 2008, which was the biggest annual drop in employment since the end of World War II, and pushed the jobless rate to a 15-year high of 7.2% from a revised reading of 6.8% in November. Signs of a deepening recession emerged throughout the week as Fortune 500 firms such as Boeing, Starbucks, and Sprint Nextel were not only cutting their earnings forecasts for the year, but are also planning to slashing their work forces over the coming months as demands from home and abroad weaken further. Nevertheless, as President Obama pledges $819B in fiscal stimulus to jump-start the economy, efforts by the administration may help the economy to avoid a deep and severe recession, but the prospect for accelerated growth in 2009 remains unlikely as credit and housing conditions remain far from normal. Meanwhile, the Federal Reserve held the benchmark interest rate steady at a record low in an effort to restore confidence in the financial market, and went onto say that the central bank stands ready to purchase 'longer-term Treasury securities' to revive bank lending. However, the MPC noted that 'inflation could persist for a time below' desired levels for price stability and longer-term economic growth as global commodity prices remain weak, but concluded their statement by saying that the 'goal of policy must be to support financial markets and the economy.' The comments suggests that the Fed will continue to expand its balance sheets exponentially in order to foster economic activity, which could weigh on the U.S. dollar as the risks for deflation intensify. Despite expectations for a dismal growth reading, as risk sentiment continue to drive price action in the forex market, the U.S. dollar may benefit from safe haven flows as risk aversion remains a dominant theme across the financial markets.
Trading the given event risk may not be as clear cut as some of our other trades as the annual rate of growth is expected to fall at a record pace, but an enhanced GDP and consumption reading could help to bolster the appeal of the greenback as market participants remain pessimistic towards the economy. Therefore, if GDP falls 4.5% or less and private spending falls less that 3.0%, we will certainly consider a long dollar trade, and will look for a red, five-minute candle following the release to confirm a short entry on two lots of EURUSD. We will place our initial stop at the nearby swing high (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion(with a mind to support and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand, if the growth figure contracts 5.0% or more and spending falls more than 3.0%, the greenback is likely to face increase selling pressures as investors anticipate a deepening recession, and will certainly favor a short dollar trade for the given event risk. As a result, we will follow the same strategy for a long EURUSD trade as the short position mentioned above, just in reverse.
DailyFX
Disclaimer
Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.
Posts
No comments:
Post a Comment