Unusual market conditions could set the dollar up for interest price action after the release of Friday’s non-farm payrolls report. The FX market’s top fundamental mover has been somewhat of a mixed bag over the past few months. Unimpressive headline releases, conflicting supplementary data and growing interest in other economic trends have led the employment release to impotency and disappointing volatility for event risk traders. However, the groundwork has been laid for a much more interesting reaction for the December number. To begin with, the market has seen a very volatile start to the New Year – something that may overcome the general sluggishness inherent in the Friday wind down.
[B]Trading the News: US Change In Non-Farm Payrolls[/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]01/04/2008 13:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: [B]70K[/B]
Previous: 90K
[B]How To Trade This Event Risk[/B]
Unusual market conditions could set the dollar up for interest price action after the release of Friday’s non-farm payrolls report. The FX market’s top fundamental mover has been somewhat of a mixed bag over the past few months. Unimpressive headline releases, conflicting supplementary data and growing interest in other economic trends have led the employment release to impotency and disappointing volatility for event risk traders. However, the groundwork has been laid for a much more interesting reaction for the December number. To begin with, the market has seen a very volatile start to the New Year – something that may overcome the general sluggishness inherent in the Friday wind down. Both Monday and Wednesday have marked considerable dollar moves despite spotty volatility; so if this trend continues, the addition of a top fundamental indicator could easily amplify a larger move. From a different point of view, the economic interest in the employment data has been stepped up over the past few weeks. Concerns that the US economy is heading for a recession has spread as credit markets are still choppy, raw material costs have reached record highs and the manufacturing sector is looking at a recession. What’s more, with all this data factored in, we have seen a dour turn in interest rate expectations. According to Fed Funds futures, the market is looking at a 66 percent chance of a quarter point rate cut and a 34 percent chance of a 50 basis point cut. A big shift in employment trends could revive hope for a stabilized growth through a strong consumer sector – the economy’s largest. Nonetheless, we will play the release cautiously and look for substantial and unimpeded surprises for an event risk trade.
Considering the evolving market conditions and the growing fear of a US recession and 50 basis point FOMC rate cut, a strong NFP number could rally significant support for a dollar long. The green back is still near its recent record lows, and still regarded as heavily oversold against most of its major counterparts. However, this is a deep rut for the world’s most widely traded currency; so we will look for a substantial upside divergence to signal a long dollar (short EURUSD) trade. A doubling in expectations may not be enough for a big dollar move (as was the case in October), but that will be our benchmark. We will look for additional improvements in sector hot spots and secondary labor data for additional support. With a strong fundamental mix, we will look for red, five minute candle close for a short on two lots of EURUSD. Our initial stop will be set above the nearby swing high (or reasonable distance) and the first target will equal this risk. The second objective will be discretionary; and to protect against losses, we will move the second stop to break even when the first target is hit.
On the other hand, faltering employment could weaken two of the dollar’s most important fundamental components: interest rates and growth. We will look for a net contraction in employment for a EURUSD long and will follow the same strategy as a short, just in reverse.
For a more indepth, fundamental look into the upcoming payrolls report, take a look at the Kathy Lien’s previewof the event.
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[I]Written By: John Kickligher, Currency Analyst for DailyFX.com[/I]