Non-Farm Payrolls Threaten To Sink The Dollar.

How To Trade This Event Risk

Friday’s Non-farm payroll report is expected to show job losses for a seventh straight month as experts are predicting the economy gave back another 75,00 jobs in the month of July. The employment report is crossing the wires this month ahead of leading indicators such as the Challenger job cuts gauge on the ISM non-manufacturing and manufacturing composites, which leaves us jobless claims and the ADP report to gleam insight. The surprising 9,000 improvement in private sector hiring conflicts with consecutive weeks of above 400,000 initial jobless claims. Since, the ADP report hasn’t traditionally been an accurate predictor for the NFP report, the mounting unemployment payrolls may signal the potential for a drop in non-farm payrolls greater than 100,000. The expected uptick to 5.6% from 5.5% in the unemployment rate will also be concerning for traders, as the last increase was due to the seasonal factor of students entering the workforce. The outlook for the U.S. economy took a hit when GDP figures missed expectations of 2.3% printing 1.9% with a 0.1% revision to the previous quarter’s reading. Expectations were that the government’s fiscal stimulus plan would generate close to 1% growth on its own. Thus, growth in the economy was stagnate absent the government intervention, which may force the Fed to leave rates unchanged for the remainder of the year.

The growth figures miss led to a sharp decline in the dollar before a better than expected Chicago PMI report reversed its losses. A better than expected employment print could send the dollar  to its highest levels since mid June. Therefore, for a bullish dollar trade(short EURUSD) we would require a job loss of less than 40,000. With a strong fundamental mix, we will look for red, five minute candle close for a short on two lots of EURUSD. Our initial stop will be set above the nearby swing high (or reasonable distance) and the first target will equal this risk. The second objective will be discretionary; and to protect against losses, we will move the second stop to break even when the first target is hit.

On the other hand, another month of over job losses may be enough for dollar bears to grab momentum back especially if the total is above 100K . We will look for a inline or greater contraction in employment for a EURUSD long and will follow the same strategy as a short, just in reverse.