trading news reports

EUR/USD: Trading the Change in U.S. Non-Farm Payrolls

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to contract 175K in October, and the slump in the labor market is likely to weigh on the outlook for future growth as private-sector spending  accounts for more than two-thirds of the economy.

Trading the News: Change in US Non-Farm Payrolls

What’s Expected
Time of release:        11/06/2009 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         -175K
Previous:         -263K

Impact the US NFP report had on EURUSD through the last 2 months

September 2009 US Change In Non-Farm Payrolls

The U.S. labor market weakened more than expected in September as non-farm payrolls tumbled 263K from the previous month amid expectations for a 175K drop, and the data reinforces a dour outlook for private spending as households face tightening credit conditions paired with the slump in wage growth. As a result, the jobless rate rose to a 26-year high of 9.8% from 9.7% in August, and businesses may continue to scale back on employment throughout the second-half of the year as policy makers see a risk for a protracted recovery. At the same time, Fed Chairman Ben Bernanke held a cautious outlook for the labor market and said that the extraordinary efforts taken on by the government may not be able enough to “substantially” bring down the jobless rate, and the slump in the labor market may continue to weigh on the outlook for future growth as private-sector spending accounts for more than two-thirds of the economy.

August 2009 US Change In Non-Farm Payrolls

U.S. non-farm payrolls slipped 216K in August amid forecasts for a 230K drop in employment, while the annual rate of unemployment jumped to a 26-year high of 9.7% from 9.4% in July as discouraged workers returned to the labor force. As the labor market deteriorates, the Federal Reserve held a cautious outlook for the economy, stating that the downturn in employment could lead to a “slow recovery,” and the central bank is widely expected to keep borrowing costs at the record-low and is likely to maintain its $1.75T in asset purchases over the coming months in order the steer the economy out of the worst recession since the Great Depression. As a result, businesses may continue to scale back on production and employment as policy makers see a risk for a protracted recovery, and the central bank is likely to hold a dovish outlook for future policy as growth prospects remain weak.

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

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to contract 175K in October, and the slump in the labor market is likely to weigh on the outlook for future growth as private-sector spending  accounts for more than two-thirds of the economy. At the same time, the jobless rate is expected to increase to an annual rate of 9.9% from 9.8% in September, which would be the highest reading since 1983, and businesses may continue to scale back on employment throughout the remainder of the year as policy makers see a risk for a protracted recovery. A report by the Commerce Department showed personal spending slipped 0.5% in September, with wage growth holding flat from August, while the Conference Board’s consumer confidence index unexpectedly slipped to 47.7 in October from 53.4 in the previous month as households lowered their outlook for future employment. Moreover, consumer credit tumbled 5.8% in August to mark the seventh consecutive monthly decline, with the Fed’s Beige Book stating that the labor market remain “weak or mixed” in most regions during the second-half of the year, while a report by ADP showed private payrolls slipped 203K in October after falling 227K in the previous month. Nevertheless, 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% after falling 0.9% during the three-months through June, and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to support the real economy. 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,” and policy makers are likely to hold a dovish outlook for price growth going into the following year as inflation expectations remain “stable.” Nevertheless, as risk trends continue to drive price action in the currency market, a rise in risk aversion could drive the U.S. dollar higher as the reserve currency benefits from safe-haven flows.

Expectations for a 175K drop in employment favors a bearish outlook for the greenback but nevertheless, price action following an enhanced NFP report could set the stage for a long dollar trade as policy makers anticipate the world’s largest economy to return to growth over the coming months. Therefore, if payrolls slip 125K or less in October, we will look for a red, five-minute candle following the release to confirm a short entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high, 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 an effort to preserve our profits.

On the other hand, the slump in global trade paired with fears of a protracted recovery may lead businesses to lower their temperament to retain their labor force, and a bigger-than-expected drop in employment is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if payrolls slump 175K or greater 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.

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars