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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

2010-05-06 19:25:00
David Song, Currency Strategist
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Trading the News: U.S. Non-Farm Payrolls

Why Is This Event Important:

As private-sector spending accounts for more than two-thirds of the world’s largest economy, the Labor Department’s employment report typically sparks increased volatility in the exchange rate as investors weigh the outlook growth and inflation. The U.S. government and the Federal Reserve have taken unprecedented steps to combat the economic downturn, and an improvement in the labor market could stoke a shift in the outlook for future policy as market participants weigh the prospects for a sustainable recovery.

What’s Expected:
Time of release:        05/07/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         190K
Previous:         162K

Will This Be Market Moving (Scenarios):


U.S. non-farm payrolls are expected to rise another 190K in April following the 162K expansion in the previous month, which would be first time employment has increased for two-consecutive month since 2007, and the data could lead the Federal Reserve to normalize policy further over the coming months as the recovery gathers pace. At the same time, private payrolls are anticipated to contribute 100K, with employment in manufacturing forecasted to increase another 20K after rising 17K in March, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.

The Upside

A bigger-than-expected rise in non-farm payrolls could stoke speculation for the FOMC to raise borrowing costs later this year, which would drive the U.S. dollar higher against its major counterparts as investors weigh the prospects for monetary policy over the medium-term. As the labor market improves, the Fed may drop its dovish rhetoric and see scope for a rate hike in the latter half of 2010 as it aims to balance the risks for growth and inflation.

The Downside

A dismal payrolls report could spark a sell-off in the greenback as the ongoing weakness in the labor market continues to weigh on the rebound in economic activity, and fears of a protracted recovery could lead Fed Chairman Bernanke to hold a cautious outlook for the economy as businesses remain reluctant to expand their labor force. As a result, the FOMC may hold a loose policy stance and support the economy throughout the second-half of the year as the central bank aims to encourage a sustainable recovery.

How To Trade This Event Risk

Expectations for a rise in employment favors a bullish outlook for the greenback, and price action following the report could set the stage for a long dollar trade as growth prospects improve. Therefore, if non-farm payrolls expand 190K or greater in April, we would need to see a red, five-minute candle subsequent to 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 after 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 breakeven once the first trade reaches its mark in order to preserve our profits.

On the other hand, businesses may keep a lid on employment going into the second-half of the year as policy makers maintain a cautious outlook for the economy, and a dismal employment report could drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if non-farm payrolls rise 100K or less, we will favor a bearish outlook for the greenback, and will utilize the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

05.06_TTN1

Impact U.S. Non-Farm Payrolls has had on EUR during the last month

05.06_TTN2

March 2010 U.S. Non-Farm Payrolls

U.S. non-farm payrolls increased 162K in March after contracting a revised 14K in the previous month amid expectations for a 184K expansion, while the annual rate of unemployment held steady at 9.7% for the third-consecutive month after falling back from 10.0% back in January. The breakdown of the report showed private payrolls expanded 123K following an unexpected 8K rise in the previous month, while employment in manufacturing advanced 17K after gaining 6K in February. At the same time, average hourly earnings slipped 0.1%, which failed to meet projections for a 0.1% rise, while average weekly hours climbed to 34.0 from a revised 33.9 in February. As growth prospects improve, investors speculate the FOMC to normalize policy further this year, but the central bank may maintain its pledge to keep borrowing costs at the record-low of an “extended period” of time in order to encourage a sustainable recovery. 05.06_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 AUD 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 AUDUSD 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 AUD 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 AUDUSD ahead of the data release.
00001_EUR 00002_EUR

Questions? Comments? Join us in the DailyFX Forum

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

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