Thursday, 02 October 2008 14:22:53 GMT
Written by David Song, Currency Analyst
U.S. Non-farm payrolls are expected to fall another 105K in September, which would be the ninth consecutive monthly decline this year.
How to Trade this Event Risk
U.S. Non-farm payrolls are expected to fall another 105K in September, which would be the ninth consecutive monthly decline this year. Indeed, we saw just yesterday that the employment component of the ISM manufacturing report, which acts as a precursor to NFP�s, fell to 41.8 from 49.7 in August, while the Challenger Job Cuts index surged higher to 32.6% from 11.7%. Furthermore, initial jobless claims rose 1K to 497K this week, which was the highest on record since the last recession in 2001. The ongoing downturn in the housing and credit sector paired with the collapse of Lehman Brothers and Washington Mutual signals that that the world�s largest economy has yet to hit rock bottom, and suggests that employment conditions may only get worse as the effects of the financial crisis spills over into the rest of the economy. Meanwhile, the Senate has voted 74-25 in favor of passing the revised bailout plan, and as the House of Representatives are scheduled to vote as early as Friday, any further developments of the rescue package could fuel bullish sentiment for the greenback. Despite the increased efforts by the government, Fed funds futures are showing that there is a 100% chance that the FOMC will cut rates at their next meeting on October 29th, with a 62% chance of a 50bp cut and a 38% chance of a 25bp cut. The growth outlook for the U.S. has clearly weakened throughout the year, which could lead the proactive Fed to take further measures to soften the landing of the economy.
If the Congress decides to pass the reformed bill on Friday, a less than expected fall in payrolls could support a rally in the U.S. dollar. With financial fears calmed, an enhanced NFP�s reading would favor a long dollar trade, and we will look for a red, five-minute candle to confirm a short entry on two lots of EURUSD. Our initial stop will be place above the nearby swing high (or reasonable distance) and our first target will equal this risk. Our second target will be based on discretion, and to preserve our profits, we will move the second stop to breakeven once the first trade reaches its target.
Conversely, if the Congress fails to act and non-farm payrolls fall for the ninth straight month, the combination could spark bearish sentiment for the U.S. dollar. Therefore, we will look for a inline or greater contraction in employment for a EURUSD long trade, and will follow the same strategy as a short, just in reverse.
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