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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

2010-07-01 18:45:00
David Song, Currency Strategist
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Trading the News: U.S. Non-Farm Payrolls

Why Is This Event Important:


However, the data could produce muted or choppy price action in the currency market as market liquidity thins ahead of the holiday weekend, and market conditions following the event could produce unfavorable trading conditions as risk trends continue to dictate price action for the major exchange rates.

What’s Expected:
Time of release:        07/02/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         -125K
Previous:         431K

Will This Be Market Moving (Scenarios):

U.S. non-farm payrolls are forecasted to drop 125K in June following the 431K expansion in the previous month, while the annual rate of unemployment is projected to rise to 9.8% from 9.7% in May as discouraged workers return to the labor force. As demands for employment remain weak, with the government stimulus tapering off, the Fed may hold a loose policy stance over the coming months in order to stem the downside risks for growth and inflation.

The Upside

As businesses increase their rate of production, with global trade conditions improving, firms may look to expand their labor force over the coming months as they hold an improved outlook for future growth. Accordingly, an enhanced employment report could lead the Fed to raise its economy assessment and encourage the MPC to normalize policy further later this year as the recovery gathers pace.

The Downside


The ADP employment report showed private payrolls increased 13K in June amid forecasts for a 60K expansion, while the ISM’s gauge for manufacturing employment slipped to 57.8 from 59.8 in May, and the ongoing weakness in the labor market may continue to weigh on economic activity as price sector spending remains one of the leading drivers of growth. As a result, the Federal Reserve may hold a cautious outlook for the region and look to support the economy throughout the second-half of the year in order to foster a sustainable recovery.

How To Trade This Event Risk

Expectations for a drop in employment certainly favors a bearish outlook for the greenback, but an unexpected improvement in the labor market could spark a bullish reaction in the U.S. dollar as the economic recovery gathers pace. Therefore, if non-farm payrolls hold flat or increase from the previous month, we will need a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low 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 cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the ongoing weakness within the real economy paired with the uncertainties surrounding the economic outlook could lead businesses to scale back on employment, and a dismal labor report could weigh on the exchange rate as growth prospects deteriorate. As a result, if payrolls slump 125K or greater in June, 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 laid out above, just in reverse.

07.01_TTN1

Impact U.S. Non-Farms Payrolls has had on USD during the previous month

07.01_TTN2

May 2010 U.S. Non-Farm Payrolls

Non-Farm payrolls in the world’s largest economy increased 431K in May, which fell short of expectations for a 536K expansion, while the annual rate of unemployment slipped to 9.7% from 9.9% in the previous month as discouraged workers left the labor force. The breakdown of the report showed private employment only increased 41K versus forecasts for a 180K rise, with manufacturing payrolls increasing 29K, while public employment jumped 411, led by a rise in temporary workers for the 2010 census. As the government pledges to tackle the ongoing weakness in the labor market  and aims to encourage a sustainable recovery, the Fed is likely to maintain a dovish policy stance going into the second-half of the year as the prospects for future growth remain weak. As a result, the FOMC is likely to maintain its pledge to keep borrowing costs close to zero for an “extended period” of time, and may keep rates on hold over the coming months in order to balance the downside risks for the economy. 07.01_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 EUR 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 EUR 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

Questions? Comments? Join us in the DailyFX Forum

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

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