Impact of the US employment report had on EURUSD through the past 3 months
December 2008 US Change In Non-Farm Payrolls
The world’s largest economy shed another 524K jobs in December to raise the 2008 total to 2.589M, which raised the jobless rate to a 15-year high of 7.2% from a revised reading of 6.8% in November, and marked the biggest annual contraction in employment since 1945. Meanwhile, the FOMC lowered their outlook for growth as the central bank projects unemployment to ‘rise significantly into 2010,’ and as signs of a deepening recession emerge, policy makers may continue to step up their efforts in order to soften the landing of the economy. Nevertheless, as President-elect pledges to save or create 3M jobs over the next two-years, efforts by the new Administration could certainly help to mitigate the downside risks for growth, but may have little or no impact on the real economy as it faces its longest recession in a quarter century.
November 2008 US Change In Non-Farm Payrolls
U.S. Non-farm payrolls fell the most in 34 years as the world’s largest economy shed 533K jobs in November. In addition, the employment reading for October was revised sharply lower to -320K from an initial reading of -240K, which raised the number of total job losses in 2008 to 1.91M. The rapid deterioration in the labor market pushed the unemployment rate to a 15 year high of 6.7% from 6.5% in the previous month. As the U.S. economy faces its longest recession in over a quarter century, conditions are likely to get worse, which foreshadows a dour outlook for the labor market. Meanwhile, President-elect Obama said that the rise in unemployment reflects the ‘urgent’ need for a stimulus plan in response to the significant downturn in the global economy, and plans to create 2.5M jobs over the next two years.
October 2008 US Change In Non-Farm Payrolls
The U.S. economy lost 240K jobs in October following a loss of 284K in the previous month, which raised the unemployment rate to a 14 year high of 6.5% from 6.1% in September. Moreover, mounting job losses pushed the total number of unemployed workers to a 25 year high of 10.08M in October, and conditions may only get worse as demands from home and abroad falter. Deteriorating fundamentals have certainly stoked fears that the U.S. will ultimately face its most severe recession in 25 years. Despite the extraordinary efforts taken on by policymakers, fears of a protracted downturn has already raised bets that the Fed will continue to ease policy further over the coming months, and would lower the interest rate below 1.00% at the December 16th policy meeting.
How To Trade This Event Risk
The U.S. labor market is expected to weaken further as economists forecast non-farm payrolls to drop another 540K In January after falling 524K in the previous month, which would raise the annual jobless rate to a 16-year high of 7.5% from 7.2%. Fears of a deepening recession paired with financial uncertainties have certainly dragged on business throughout the second half of 2008, and conditions are likely to get worse as Fortune 500 firms such as Boeing, Caterpillar, Target, along with many others slash their earnings forecast for the year. As firms continue to face weakening demands from home and abroad, business have been aggressively cutting their work force in an effort to reduce costs, which raised continuing claims for unemployment benefits to its highest level since 1967, and firms are likely to cutback on employment and production further as the International Monetary Fund forecast the annual rate of growth for the world’s largest economy to contract 1.6% this year. The advanced GDP reading for the fourth quarter showed that economic activity plunged 3.8% after falling 0.5% in the previous quarter, while personal spending slipped another 3.5% after posting a 3.8% drop in the third quarter. In addition, the Commerce Department also reported that retail spending fell for the sixth consecutive month in December, which marked the worst slump in domestic demands since records began in 1992, and as private-spending accounts for nearly two-thirds of GDP, firms are likely to boost cost-cutting measures over the first half of the year as growth prospects deteriorate at a record pace. Meanwhile, earlier this week we saw that job cuts in January more than tripled from the previous year to reach a seven-year high, while a separate report showed that private payrolls slumped 522K during the same period amid expectations for a 535K decline. The data certainly foreshadows the dire state of the labor market, and as President Obama pledges nearly $800B to simulate the economy, efforts by the Administration will certainly help to mitigate the downside risks for growth, but may fall short to meet expectations to jump-start the economy as the financial markets remains under stress. As the growth outlook for the U.S. economy remains bleak, a rise in unemployment could spur increased selling pressures for the dollar, but as risk trends continue to dictate price action in the forex market, the reserve currency may continue to benefit from save haven flows.
Trading the given event risk clearly favors a bearish forecast for the U.S. dollar as market participants anticipate the jobless rate to surge higher, but the better than expected ADP release has left the door open for an enhanced payrolls reading, which would certainly increase the appeal of the greenback. As a result, if the employment data crosses the wires stronger than expected (less that -500K), we will keep an eye out for a red, five-minute candle following the release, which could support a short entry (long dollar) on two lots of EURUSD. Once these conditions are met, we will place our initial stop above the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, the slew of job cuts by Fortune 500 firms during the previous month reinforces the likelihood for further weakness in the labor market, and an inline print or a drop of more than 540K in payrolls would clearly favor a short dollar trade for the given event risk. Therefore, a dismal payrolls release would set the stage for a long EURUSD trade, and we will follow the same strategy for the long position as the short trade mentioned above, just in reverse.
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