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

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

2010-03-04 19:34:00
David Song;Michael Wright,
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Trading the News: Change in US Non-Farm Payrolls

What’s Expected
Time of release:        03/05/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         -63K
Previous:         -20K

Impact the US NFP report had on EURUSD through the last 2 months

03.04_TTN1

January 2010 Change In US Non-Farm Payrolls

U.S. non-farm payrolls unexpectedly weakened in January, with employment slipping 20K following a revised 150K drop in the previous month. At the same time, the Labor Department report showed the unemployment rate in the U.S. slip to 9.7% from 10.0% during the same period as discouraged workers left the labor force. Taking a deeper look into the report, manufacturing payrolls increased 11K from December to mark the first advance in three years, and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy. Nevertheless, as the Fed aims to encourage a sustainable recovery, the central bank is likely to maintain dovish outlook for future policy, and we may see the MPC hold the benchmark interest rate at the record-low throughout the first-half of the year as a result of the ongoing weakness in the private sector. 03.04_TTN2

December 2009 Change In US Non-Farm Payrolls

Non-farm payrolls in the U.S. unexpectedly dived in December, with the reading tumbling 85K subsequent to climbing a revised 4K the previous month amid economists’ expectations of 0K. The less-than-expected reading supports Federal Reserve forecasts that a labor market recovery will take ample time, thus causing interest rates to remain near zero for the next six months. Taking a closer look at the report, the number of part-time workers who would prefer full time work climbed to 17.3% during the period from 17.2% the month prior, while the number of people with jobs who are unable to work due to negative climate change surged to 241K, marking the most the reading has rose since January 2009.  At the same time, the number of temporary workers advanced to 46.5K, posting the fifth straight monthly gain. 03.04_TTN3

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 Euro 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 Euro 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.
00001_EUR 00002_EUR

How To Trade This Event Risk

The U.S. dollar is likely to face increased volatility over the next 24 hours of trading as economists forecast non-farm payrolls to slump 63K in February, and the ongoing deterioration in the labor market could instill a weakened outlook for the world’s largest economy as private-sector spending remains one of the leading drivers of growth. Nevertheless, the preliminary 4Q GDP report showed economic activity increased 5.9% amid an initial forecast for a 5.7% expansion in the growth rate, led by a rise in business investments, while household spending advanced 1.7%, which fell short of expectations for a 2.0% rise. Moreover, a report by the Commerce Department showed orders for durable goods jumped 3.0% in January to exceed forecasts for a 1.5% rise, and businesses may increase their willing to expand their labor force and increase their rate of production as the recovery gains momentum. Nevertheless, the ADP employment report showed private payrolls slipped 20K in February following a revised 60K drop in the previous month, and the Federal Reserve is likely to maintain a dovish outlook for future policy as labor demands remain “generally soft.”

The Fed’s Beige Book release earlier this week said economic conditions in nine of the twelve districts improved, with household consumption increasing “slightly” in most regions, but saw “minimal” wage growth paired with “weak” demands for borrowing. At the same time, the central bank said non-financial service-based activity were “steady or improved” for the most part, with manufacturing expanding “further,” and the FOMC may continue to normalize policy over the coming months as growth prospects improve. Nevertheless, Fed Chairman Ben Bernanke expects to see a “nascent” recovery this year and argued that “a sustained recovery will depend on continued growth” in private-sector demands during his testimony in front of the House Financial Services Committee, and went onto say that “increasing incidence of long-term unemployment” remains a major area of concern for the central bank. As a result, the FOMC is likely to keep the benchmark interest rate at the record-low of 0.25% for an “extended” period of time as households continue to face a weakening labor market paired with tightening credit conditions, but the expansion in monetary and fiscal policy is likely to support economic activity going forward as the stimulus continues to feed through the real economy.

Trading the given event risk favors a bearish outlook for greenback as market participants expect non-farm payrolls to weaken further, but an enhanced labor report could set the stage for a long dollar trade as the economy emerges from the worst recession since the Great Depression. Therefore, if we see employment hold steady or unexpectedly rise from the previous month, we would need to see a red, five-minute candle following the release to generate 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 taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first lot reaches its mark in order to preserve our profits.

In contrast, the ongoing weakness in the private-sector may continue to weigh on the labor market, and a drop in non-farm payrolls is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if job losses increase 65K or greater from the previous month, we will favor a bearish outlook for the greenback, and will utilize the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

03.04_TTN4

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To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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