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

Trading the News: U.S. Non-Farm Payrolls

Why Is This Event Important:

The Fed maintained a cautious outlook for the region and said that the labor market appears to be weaker than initially anticipated, and the central bank went onto say that the downside risks to the recovery seem to be larger than expected in its policy meeting minutes release earlier this week.

What’s Expected:

Time of release:09/03/2010 12:30 GMT, 8:30 EST

Primary Pair Impact :EURUSD

Expected: -100K

Previous: -131K

Will This Be Market Moving (Scenarios):

Non-farm payrolls in the world’s largest economy is forecasted to contract another 100K in August following the 131K decline in the previous month, while market participants project the annual rate of unemployment to bounce back to 9.6% after holding at 9.5% during the previous month. As growth prospects deteriorate, the greenback may continue to lose ground going into the holiday weekend, but a drop in market liquidity could spark choppy price action, which would make trading the event increasingly difficult. At the same time, with market sentiment continuing to dictate price action for the currency market, the data could spark a rise in risk aversion could drive the dollar higher as it continues to benefit from safe-haven flows.

The Upside

The breakdown of the ISM manufacturing report showed its gauge for employment climbed to 60.4 in August from 58.6 in the previous month, with the Conference Board’s household confidence survey bouncing back to 53.5 from a revised 51.0 in July, and businesses may look to expand their labor force at a faster pace over the coming months as private sector demands improve. Accordingly, there could be a slightly better-than-expected NFP report, which could lead the U.S. dollar to strengthen against its major counterparts, and push the Fed to reassess its outlook for the economy as the prospects for future growth improve.

The Downside

At the same time, the ADP employment report for August showed private payrolls unexpectedly slipped 10K after rising a revised 37K in the month prior, and the ongoing weakness within the real economy may lead businesses to keep a lid on employment as policy makers lower their outlook for future growth. As a result, a dismal non-farm payrolls report could lead the central bank to expand monetary policy further over the coming months, which could instill a bearish outlook for the greenback as the recovery in the U.S. lags behind the rest of the industrialized economies.

How To Trade This Event Risk

Expectations for a drop in U.S. employment certainly favors a bearish outlook for the greenback, but an enhanced NFP report could set the stage for a long dollar trade as growth prospects improve. Therefore, if payrolls contract 50K or less in August, we will need to see a red, five-minute candle subsequent to the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its market in order to preserve our profits.

In contrast, the ongoing weakness within the private sector paired with the cautious outlook held by the central bank may lead businesses to keep a lid on employment, and a dismal payrolls report could certainly weigh on the greenback as the recovery loses pace. As a result, if employment contracts 100K or greater from the previous month, we will favor a bearish outlook for the reserve currency, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

Impact that U.S. Non-Farm Payrolls has had on USD during the last month

July 2010 U.S. Non-Farm Payrolls

Non-farm payrolls in the world’s largest economy contracted 131K in July, which exceeded forecasts for a 65K decline, while the annualized rate of unemployment held steady at 9.5% for the second month amid projections for a 9.6% print. The breakdown of the report showed private payrolls increased 71K versus expectations for a 90K rise, with jobs in manufacturing advancing 36K, while a 202K drop in government positions led the decline. As businesses increased production and employment, the recovery in the private sector may gather pace over the coming months, but the economic recovery is likely to cool going forward as the effects of the fiscal stimulus taper off. As a result, the Fed may continue to support a dovish outlook for future policy and look to support the real economy throughout the second-half of the year in an effort to stem the downside 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 EUR 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 EUR 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.

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