[B][U]Trading the News: US Change in Non-Farm Payrolls[/U][/B]
[B][U]What is Expected[/U][/B]
Time of release: [B]8:30 EST, 12:30 GMT 8/3/2007[/B]
Primary Pair Impact : [B]EUR/USD[/B]
[B]How To Trade This?[/B]
In the past, the US?s non-farm payroll report was the undisputed event-risk trade in the currency market. Recently however, the reaction to the employment report has been muted and often has countered what fundamentals would suggest. Looking back at the last three reports, it is clear that the indicator is becoming harder to trade under our specific trading criteria. In both April and May, modest surprises stoked volatility, though they each lacked a strong direction. April?s disappointment led to an eventual 40 point rise in EURUSD, while May?s improvement gave a 60 point move in the dollar?s favor; though neither initially moved the market in the fundamentally right? direction. The opposite was true of the June release. EURUSD dipped on a modest surprise, but rallied against the dollar after the initial five minute bare cleared. There are a few things we can learn from these reactions. First, a surprise to the upside or downside is not as important as the extent of the divergence. Considering past releases, a miss of 25,000 to 50,000 is likely the minimum for a first reaction with follow through. This may be the case if the ADP holds any correlation to this month?s NFPs. Next, a big revision to the previous number could contribute to the move, though it is clearly a secondary or complementary effect. Regardless, targets should be conservative.
A long dollar trade (short EURUSD) has a few requirements. First of all, the indicator has to print much better than the market is expecting. Should it be only modestly better, there may be no follow through and a trade triggered on a red five minute candle could be quickly stopped out. Also, an eye should be kept on the revision. A big downward revision could impede a dollar follow through ruin an otherwise good fundamental trade. For cautious traders, should there be any question about how bullish the report is, waiting for a close on a second red candle could help confirm follow through.
The same conditions should apply to a bearish outcome for the employment report. A shortfall that runs 50,000 or lower would likely trigger a strong trade. What?s more, after a number of disappointing, secondary employment reports were released earlier this week, the market may be prepared for a modest drop in payrolls. This only increases the need for a big miss. With confirmation of a considerable disappointment and a five minute green bar (or two five minute bars for conservatives), a position of two long EURUSD lots should be established. The stop would be the recent swing low with a first target that matches the risk. A second target should be discretionary.