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April Non-Farm Payrolls Fall by Only 20k, Dollar Rallies

Friday, 02 May 2008 12:47:47 GMT

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Written by Kathy Lien, Chief Strategist
To the relief of dollar bulls, US corporations cut only 20k jobs in the month of April compared to the market's -75k expectations. The unemployment rate also dropped from 5.1 to 5.0 percent, triggering a widespread dollar rally. The better than expected NFP number will help to confirm the near term bottom in the US dollar.
The manufacturing sector continued to lose jobs, as the primary improvement came from the service sector. Unfortunately calling NFPs this month was particularly difficult since service sector ISM is not released until Monday. This is actually the third month in a row that the service sector has added jobs thanks to education, leisure and business services. The positive thing about the report is that there was 29k jobs cut from the private sector, only slightly worse than the headline number. 
 
However traders should be careful of being overly optimistic because given the amount of layoffs that have been announced over the past month and the trend of jobless claims, this should only be a temporary relief in the US economy. We have given the reasons in our non-farm payrolls preview.
 
If the US economy is truly in a recession, job losses will escalate. During the last 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. In each of the past 3 recessions, the largest single month job loss was more than 300k. In this context, there is still a very strong possibility of a 100k drop in the coming months. 
 
For the Federal Reserve, this is good news because it validates their hawkish comments. They also have the benefit of seeing the non-farm payrolls report for the month of May before making their next monetary policy decision.
 
EUR/USD Could Still Head Lower
 
Sentiment and technicals have been pointing to further gains for the US dollar and weakness in the Euro and now with non-farm payrolls, fundamentals support that view as well.  The Federal Reserve also expanded the collateral that they are willing to receive under the Term Securities Lending Facility.  This is aimed at adding liquidity to the financial system which should also be positive for the financial markets.
 
Our FXCM Speculative Sentiment Index flipped for the first time since 2006. As a contrarian indicator, the flip suggests that we could see a further weakness in the EUR/USD over the next few weeks.

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From a technical basis, our analyst Jamie Saettele indicated that if you follow our Daily Technical report, then you have been on top of the EURUSD decline in recent days. Here is a review and what to expect as event risk will likely lead to increased volatility. The decline since 1.6018 is unfolding as an unmistakable impulse. 5 waves down from 1.6018 to 1.5554 was the indication that the larger trend had changed from up to down. A 3 wave setback in wave 2 confirmed our bearish bias (notice that wave 2 ended right at the 4th wave of one less degree…which is common). Wave 3 is underway now. 3rd waves are the ‘meat’ of the trend; the big move that every trader wants to catch. Interestingly, 3rd waves bring added volatility, which fits perfectly with the NFP release tomorrow morning. Going forward, remain aggressively bearish against 1.5643 (red line). Resistance for tonight and tomorrow morning should be strong in the 1.5500/1.5540 zone (black lines). Measured support does not begin until 1.5230 (100% extension of 1.6018-1.5554/1.5694). Subjectively, we favor a deeper decline to at least the 161.8% extension, at 1.4943, in the coming weeks.

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By Kathy Lien, Chief Strategist of DailyFX.com

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