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

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:         -125K
Previous:         -190K

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

October 2009 Change In US Non-Farm Payrolls

U.S. non-farm payrolls slipped 190K in October amid expectations for a 175K decline, which pushed the annual rate of unemployment to 10.2%, which is the highest reading since 1983. The breakdown of the report showed the average workweek held at the record low for the second month, while the number of discouraged workers leaving the labor force increased to 5.7% from 5.5% in September, and the data foreshadows a dour outlook for private sector spending as households continue to face a weakening labor market paired with tightening credit conditions. Nevertheless, as the expansion in monetary and fiscal policy continues to feed through the real economy, policy makers anticipate the economy to emerge from the worst recession since the Great Depression however, the Fed is likely to hold the benchmark interest rate at the record-low going into the following year in order to encourage a sustainable recovery.

September 2009 Change In US 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.

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

U.S. non-farm payrolls are expected to contract 125K in November, which would be the smallest decline since March 2008, while the annual rate of employment is forecasted to hold at the 26-year high of 10.2%, and the data could stoke increased selling pressures on the dollar as investors weigh the prospects for a sustainable recovery. Nevertheless, as the greenback remains the most popular funding currency next to the Japanese Yen, a rise in risk aversion could drive the dollar higher as it continues to benefit from safe-haven flows. The preliminary GDP reading showed the growth rate expanded at an annual pace of 2.8% in the third quarter amid an initial forecast for a 3.5% rise, while personal consumption increased 2.9% versus expectations for a 3.2% clip, and a rise in unemployment is likely to spur a dour outlook for private spending as households continue to face fading demands for employment paired with tightening credit conditions. Moreover, the ADP labor report released earlier this week showed private payrolls slumped 169K in November to exceed expectations for a 150K drop, while the breakdown of the ISM manufacturing report reinforced a weakened outlook for the labor market as the employment component weakened to 50.8 from 53.1 in October. However, the Fed’s Beige Book noted that economic conditions have “improved modestly,” and went onto say that consumer spending “picked up modestly” across the 12 districts even as credit standards remained tight. In addition, consumer confidence unexpectedly increased in November, with the Conference Board’s index rising to 49.5 from 48.7 in the previous month, while retail spending jumped 1.4% in October to top forecasts for a 0.9% rise, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to support the real economy. Meanwhile, Fed Chairman Ben Bernanke said that “significant economy challenges remain” as the recovery remains weak, with St. Louis Fed President James Bullard pushing for the central bank to extend its emergency programs beyond the March deadline in order to give “the Fed the option to react to future news,” and the board may continue to hold a dovish outlook for future policy as inflation expectations remain “stable.” As a result, market participants anticipate the Federal Reserve to hold the benchmark interest rate at the record-low throughout the first-half of the following year as policy makers see a risk for a protracted recovery, and may look to extend its emergency programs over the coming months in order to encourage a sustainable recovery.

Trading the given event risk favors a bearish outlook for the greenback as economists anticipate the labor market to weaken further however, price action following an enhanced employment report could set the stage for a long dollar trade. Therefore, if payrolls slump 100K or less in November, we will look for a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the 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.

In contrast, tightening credit conditions paired with the slump in global trade may lead businesses to scale back on production and employment in order to reduce costs, and a drop in U.S. payrolls could weigh on the exchange rate as policy makers continue to see a risk for a protracted recovery. As a result, if NFP’s slump 125K or greater from the previous month, we will favor a bearish outlook for the greenback, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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