[U][B]Trading the News: US Change in Non-Farm Payrolls[/B][/U]
[B]What’s Expected[/B]
Time of release: [B]07/02/2009 12:30 GMT, 08:30 EST
[/B]Primary Pair Impact : [B]EURUSD
[/B]Expected: -363K
Previous: -345K
[U][B]Impact the US NFP report had on EURUSD through the last 2 months
[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
06/05/2009 12:30 GMT
-520K
[B]-345K[/B]
-216
-280
Apr 2009
05/08/2009 12:30 GMT
-600K
[B]-539K[/B]
+13
+155
[U]
May 2009 US Change In Non-Farm Payrolls[/U]
The U.S. economy shed another 345K job May amid expectations for a 520K drop in non-farm payrolls, while the annual rate of unemployment surged to a 25-year high of 9.4% as discouraged workers returned to the labor force. The data encouraged an improved outlook for the world’s largest economy, with market participants raising bets for an economic recovery later this year, and long-term expectations for higher interest rates could lead the dollar higher over the near-term. At the same time, Fed Chairman Bernanke held a dour outlook for the economy as he expects unemployment to rise well ‘into the next year,’ and sees a risk for a ‘sizeable’ increase in job losses as businesses continue to scale back on production and employment in an effort to reduce costs. As a result, the outlook for private spending remains bleak, and households may turn increasingly pessimistic towards the economy as the labor market deteriorates.
[U]April 2009 US Change In Non-Farm Payrolls[/U]
U.S. Non-Farm Payrolls fell 539K in April amid expectations for a 600K drop in employment, while the jobless rate surged to 8.9% from 8.5% in March, which is the highest level since 1983. The data breakdown of the report showed public-sector jobs increased 72K during the month, with the participation rate rising to 65.8% from 65.5%, while private payrolls slumped 611K from the previous month. The data suggests economic conditions are beginning to stabilize as the government takes unprecedented steps to stimulate the ailing economy however, growth prospects are likely to remain subdued throughout the first half of the year as households face a weakening labor market paired with fears of a protracted downturn. At the same time, the collapse of the auto industry is likely to weigh on the economy going forward, and the jobless rate is likely to push higher as GM and Chrysler head into bankruptcy.
[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:
[U][B]Bullish Scenario:[/B][/U]
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.
[U][B]Bearish Scenario:[/B][/U]
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. labor market is widely expected to weakening further in June, with economists forecasting a 363K drop in non-farm payrolls, and the data could reinforce a dour outlook for future growth as households face fading demands for employment. The final GDP reading showed the world’s largest economy contracted 5.5% in the first quarter, with business spending marking the biggest decline since recordkeeping began in 1947, and conditions may get worse throughout the year as firms continue to scale back on production and employment in an effort to reduce their cost structure. At the same time, a report by the Labor Department showed initial jobless claims unexpectedly increased in the week ahead of June 20, with continuing claims pushing higher, while the ADP employment report showed at 473K drop in private payrolls from May. Moreover, a separate report by the Commerce Department showed the savings rate surged to a 15-year high in May amid the 1.4% rise in personal income, and the data highlights the dire state of the economy as private-sector spending falters. As Fed Chairman Ben Bernanke expects job losses to rise well’ into the next year’ and continues to see a risk for a ‘sizeable’ increase in unemployment, the central bank is anticipated to hold the benchmark interest rate at the record-low for an extended period of time, and may take additional steps to jump-start the economy as the nation faces its worst recession in over half a century. Meanwhile, the FOMC projects inflation to remain ‘subdued for some time’ as economic activity falters, but went onto say that ‘the pace of economic contraction is slowing,’ with financial conditions ‘generally’ improving. The comments suggest that the central bank will continue to hold a dovish policy stance going forward as growth prospects remain subdued, and the board may expand its asset purchase program over the near-term as the economic outlook remains bleak.
Expectations for a 363K drop in NFP’s favors a bearish outlook for the dollar however, the 9.0% drop in job cuts during the month of June paired with the less than expected drop during May has left the door open for an upward surprise. Therefore, if payrolls fall 250K or less, we will look for 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 a reasonable distance, and this risk will establish our first target. Our 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 target in order to lock-in our profits.
In contrast, the downturn in global trade paired with fears of a protracted economic downturn could lead businesses to take additional measures to whether the worst financial crisis since the Great Depression, and price action following a dismal employment report could set the stage for a short dollar trade. As a result, an in-line print or a drop of more than 363K would lead us to favor a bearish outlook for the greenback, and we will follow the same strategy for a long euro-dollar trade as the short position revealed above, just in reverse.
