The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to drop another 660K in March, and the data is likely to reinforce a dour outlook for growth and inflation as households face a deteriorating labor market.
[B][U]Trading the News: US Change in Non-Farm Payrolls[/U][/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]04/03/2009 12:30 GMT, 08:30 EST
[/B]Primary Pair Impact : [B]EURUSD[/B]
Expected: -660K
Previous: -651K
[B][U]Impact the US NFP report had on EURUSD through the last 2 months
[/U][/B]
[U]February 2009 US Change In Non-Farm Payrolls[/U]
The world’s largest economy lost another 651K jobs in February following the 655K drop in the previous month to mark the worst slump since recordkeeping began in 1939, and raised the jobless rate to a 26-year high of 8.1% from 7.6% in January. The data continues to foreshadow a dour outlook for private spending as households face a weakening labor, and conditions are likely to get worse as the economy faces its worst economic downturn in over half a century. After losing 4.4M jobs since the recession took hold of the nation in December 2007, President Obama’s $787B stimulus package plans to save or create 3.5M jobs over the next two years however, with more job losses still to come, efforts by the Administration could fall short of expectations as firms slash their labor force at a record pace in response to the downturn in the global economy.
[U]January 2009 US Change In Non-Farm Payrolls[/U]
Payrolls in the U.S. fell 598K in January, which was the biggest monthly decline since 1974, and raised the annual rate of unemployment to a 16-year high of 7.6% from 7.2% in the previous month. As fears of a deepening recession intensify, firms are likely to cutback on production and employment in an effort to reduce costs, and the labor market is expected to weaken further throughout 2009 as the world’s largest economy faces its worst financial crisis since the Great Depression. The data certainly reinforces the dire state of the economy, and fears of a prolonged economic downturn is likely to stoke increased pressures for the U.S. Congress to approve President Obama’s $900B stimulus package, which should help to mitigate the downside risks for growth, but as the banking sector remain under pressure, the outlook for improved growth remains bleak.
[B]What To Look For Before The Release[/B]
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:
[B][U]Bullish Scenario:[/U][/B]
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.
[B][U]Bearish Scenario:[/U][/B]
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.
[B]How To Trade This Event Risk[/B]
The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to drop another 660K in March, and the data is likely to reinforce a dour outlook for growth and inflation as households face a deteriorating labor market. The world’s largest economy has lost nearly 4.5M jobs since the recession took hold of the industrialized nation in December 2007, and the economic docket foreshadows a weakening outlook for employment as firms continue to slash their labor force at a record pace in an effort to lower costs. The ADP labor report, which crossed the wires much weaker than expected, showed that private payrolls plunged 742K in March to mark the biggest drop since comparable record began in 2001, while a separate report showed that jobs cuts in the region rose to 180.7% from 158.4% in February. Furthermore, continuing claims for unemployment benefits surged to a record-high of 5.73M in the week ending March 21, while initial jobless claims pushed to a 27-year high of 669K, and the economic outlook continues reinforce fears of a deepening recession in the U.S. as the Organization for Economic Cooperation and Development projects the annual rate of growth to contract 4.0% this year. Moreover, the group stated that the economic downturn in the region ‘has deepened sharply, with output contracting at an alarming pace and the labor market weakening rapidly’ as they anticipate the unemployment rate to peak at 10.5% by the end of 2009, and the forecasts are significantly weaker than what the Obama Administration has called for as the White House expects the jobless rate to average 7.9% and the growth rate to fall 1.2% this year. As the outlook for growth and inflation remains bleak, President Obama’s $787B stimulus package may fall short of expectations as the downturn in the global economy intensifies, and the OECD claimed that additional stimulus measures could be required to soften the landing of the economy as credit conditions remain far from normal. Meanwhile, Treasury Secretary Geithner said he sees ‘encouraging signs’ in the financial markets as a result of the unprecedented steps taken by the government, while Fed Chairman Ben Bernanke spurred hopes for a speedy recovery during an interview earlier this month as he expects the recession to end this year. Despite the encouraging comments from the Treasury and the central bank, economic conditions are likely to deteriorate further as business face fading demands from home and abroad. Nevertheless, as risk trends continue to dictate price action in the financial markets, a rise in risk aversion following the release could boost demands for the greenback as the reserve currency continues to benefit from safe-haven flows.
Expectations for a 660K drop in employment favors a bearish outlook for the dollar however, the unexpected rebound in the ISM’s employment component has left the door open for an enhanced NFP reading. Therefore, if payrolls fall less than 600K, we will look for 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 place our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
Conversely, as the economic downturn intensifies, the labor market is likely to weaken further as firms take aggressive steps to lower their cost structure, and a dismal labor report would favor a bearish dollar trade as the outlook for growth and inflation remains bleak. As a result, an in-line print or a drop of more than 660K in payrolls would lead us to sell the greenback, and we will follow the same strategy for a long euro-dollar trade as the short position listed above, just in reverse.
[B]NFP’s Fall Less Than Expected - Stronger Than Expectations[/B]
[B]Labor Market to Weaken Further – Lower Than Expectations[/B]
