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:        02/05/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         15K
Previous:         -85K

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

December 2009 Change In US Non-Farm Payrolls

Non-farm payrolls in the U.S. unexpectedly dived in December, with the reading tumbling 85K subsequent to climbing a revised 4K the previous month amid economists’ expectations of 0K. The less-than-expected reading supports Federal Reserve forecasts that a labor market recovery will take ample time, thus causing interest rates to remain near zero for the next six months. Taking a closer look at the report, the number of part-time workers who would prefer full time work climbed to 17.3% during the period from 17.2% the month prior, while the number of people with jobs who are unable to work due to negative climate change surged to 241K, marking the most the reading has rose since January 2009.  At the same time, the number of temporary workers advanced to 46.5K, posting the fifth straight monthly gain.

November 2009 Change In US Non-Farm Payrolls

Non-farm payrolls in the U.S. slipped 11K in November amid expectations for a 125K drop in employment, which marked the fewest amount of jobs losses since the recession began in 2007. At the same time, the unemployment rate pulled back to 10.0% from a 26-year high of 10.2% in October, with expectations of the rate holding at 10.2%., and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, it is noteworthy to take into account that the people who want work by have given up looking pushed back to 17.2% from 17.5%. Meanwhile, Treasury Secretary Timothy Geithner stated that the unemployment rate will probably be lower than 10% in a year as policy makers aim to balance the risks for growth and inflation.

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 forecasted to increase 15K in January after unexpectedly contracting 85K in the previous month, and the data is likely to stoke increased volatility in the exchange rate as investors weigh the prospects for a sustainable recovery in the world’s largest economy. The advanced 4Q GDP report encouraged an enhanced outlook for the region as the growth rate increased at an annual pace of 5.7% to top forecasts for a 4.7% expansion, and conditions are likely to improve going forward as the nation emerges from the worst recession since the Great Depression. Moreover, a report by ADP released earlier this week showed private payrolls slipped 22K in January amid expectations for a 30K decline, while the ISM manufacturing employment component advanced to 53.3 from 50.2 in December to mark the highest reading since April 2006. At the same time, the ISM’s non-manufacturing report showed its gauge for service-based employment increased to 44.6 in January from 43.6 in the previous month, and businesses may raise their temperament to expand their labor force as the economy returns to growth. 

Nevertheless, the Federal Open Market Committee held the benchmark interest rate at the record-low of 0.25% in January and reiterated that borrowing costs will stay low for an “extended period” of time as the central bank aims to balance the risks for growth and inflation. The Fed stated economic conditions continued to improve and noted that the deterioration in the labor market appears to be “abating,” but expects to see a “moderate” recovery for a time as households continue to face tightening credit conditions paired with fading demands for employment. Moreover, the central bank saw business spending “picking up” even as they remained “reluctant” to expand their labor force, and expects “a gradual return to higher levels of resource utilization” as the expansion in monetary and fiscal policy continues to feed through the real economy. However, MPC member Thomas Hoenig dissented and said that keeping the interest rate at the record-low for an “extend period” period of time was “no longer warranted,” and the central bank may turn increasingly hawkish over the coming months as the recovery continues to gather momentum.

Expectations for a rise in employment favors a bullish outlook for the greenback as policy makers hold an enhanced outlook for future growth, and price action following the release could set the stage for a long dollar trade. Therefore, if non-farm payrolls increase 15K or greater in January, we will need to see 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 set the initial stop at the nearby swing low or a reasonable distance taking market volatility into account, and this risk will be used to gauge 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 hits its target in order to lock-in our profits.

On the other hand, the slump in domestic demands paired with fears of a protracted recovery may lead businesses to keep a lid on production and employment, and a dismal labor report could weigh on the exchange rate as the outlook for future growth remains uncertain. As a result, if payrolls unexpectedly hold flat or contract from the previous month, we will favor a bearish outlook for the greenback, and will implement the same setup 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