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4 NFP-Inspired Trade Targets

4 NFP-Inspired Trade Targets

Boris Schlossberg, Technical Strategist

With the markets widely expecting a strong US non-farm payrolls (NFP) report, conditions exist that could produce tradable moves between the dollar and major counterparts like the yen, euro, pound, and Canadian dollar.

The USDJPY pair has continued to power higher in Asian and early-European trade, as the pair broke above the key 95.50 level on expectations that today's US non-farm payrolls (NFP) report will be stronger than consensus expectations. This week’s positive string of economic data has convinced the market that the US is now vastly outperforming the rest of the G-3, which has attracted further flows into the greenback.

See also: The Best Currency for Growth and Safety

The rest of the majors have remained relatively quiet, as is typical on pre-NFP day, with EURUSD trading on either side of 1.3100, GBPUSD rebounding after again testing 1.5000, and the Australian dollar (AUD) showing some weakness in Asian trade after Chinese trade balance data showed that imports contracted by -15.2%, raising concerns that demand for Australia's coal and iron ore is waning.

After a series of better-than-expected indicators, the market is now primed for a stronger print in the NFP data. The consensus call is for 173K new jobs, roughly matching January's 161K print. However, the employment component of the ISM services report, as well the ADP number, suggest that today’s NFP number could be closer to 200K. The surprisingly sharp drop in weekly jobless claims also supports the view that US labor market demand is fairly robust.

Given those conditions, sentiment is clearly skewed to the upside, and unless NFPs print at 225K or better, the reaction may be fairly limited. Still, it may be worthwhile to examine a few possible scenarios for today's marquee event:

  • USDJPY is the prime focus for the event today, and with the pair now at fresh highs, there is little resistance to the upside, so a solid NFP print could push the unit to a test of 96.00 as the momentum rally continues to roll on. If the data proves positive, analysts will now start talking about the 100 level in USDJPY in the foreseeable future.
  • EURUSD, however, is a much more complicated case, as the pair has now ceased trading on risk flows and could actually drop lower if the NFP number posts a strong gain. Yesterday's relatively upbeat presser by European Central Bank (ECB) president Mario Draghi provided the euro with a temporary lift, but as we noted earlier, the rally may prove to be fleeting if Eurozone economic data does not improve relatively soon. Still, the pair has very strong support at the 1.2950 level and may not decline much unless that handle is broken.
  • GBPUSD remains in a steep downtrend, and although it has been able to find support below the 1.5000 level, it may finally crack hard if the US NFP number beats estimates. Yesterday's relief rally following the Bank of England (BoE) meeting has essentially worn off, and as the market focuses on the increasing disparity between US and UK growth differentials, cable is likely to see further downside pressure.
  • USDCAD is perhaps the most interesting pair to examine as both Canadian and US employment numbers will be released at the same time. The Loonie has weakened markedly against the dollar, with USDCAD rising to 1.0300 level as the US economy continues to outperform Canadian results. Last month's horrid -21.9K print along with a persistently dovish Bank of Canada (BOC) has pushed USDCAD to fresh yearly highs. If the divergence continues, and worse, if Canada records a second consecutive month of job losses while US NFP prints in the neighborhood of 200K, USDCAD could take out the 1.0400 level and ultimately target 1.0500 as speculative flows move south of the border.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.