The market’s top market moving economic indicator (the non-farm payrolls release) is due Friday; and the release couldn’t have come at a more critical time for the US dollar. After a significant rally against nearly everyone of its major counterparts the currency may finally be losing steam. Will an eighth consecutive contraction in employment break the dollar’s rally? Where are the best oppurtunities to play this event risk? Read on to find out.
What is the Market Expecting for August Non-Farm Payrolls?
Change in Non-Farm Payrolls: -75k Forecast, -51k Previous
Unemployment Rate: 5.7% Forecast, 5.7% Previous
Change in Manufacturing Payrolls: -35k Forecast, -35k Previous
Average Hourly Earnings: 3.4% Forecast, 3.4% Previous
Average Weekly Hours: 33.6 Forecast, 33.6 Previous
In order to determine the strength of non-farm payrolls, we typically look at 10 pieces of data that we call the leading indicators for non-farm payrolls. Seven out of the ten releases point to greater job losses, putting the odds in favor of a weak non-farm payrolls reading in line with expectations. More specifically:
The Negatives
• ISM Services Employment Signals Contraction for the Fourth Consecutive Month
• ISM Manufacturing Employment Below 50 During 9 of the Past 10 Months
• ADP Employment Falls by 33K Vs. Improvement of 1K Last Month
• Work Stoppages Increase as Striking Workers Amount to 4.2K
• Initial Jobless Claims 4-Week Moving Average Holds Near 5-Year High
• Continuing Claims Edge Toward November 2003 Highs
• Challenger Job Cuts Rise for 6th Consecutive Month
The Positives
• U of M, Conference Board Consumer Confidence Both Improve For Second Consecutive Month
• Help Wanted Online Index Rises by 7% from Last Month
• Monster.com Index Improves Slightly For First Time In 4 Months
Clearly, the odds are in favor of yet another round of disappointing non-farm payrolls numbers, and this is likely to mark the eighth consecutive month of job losses while the unemployment rate is forecasted to hold at a 4+ year high of 5.7 percent. From a fundamental perspective, additional evidence of surging job losses should weigh on the US dollar and lead fed fund futures to price in fewer Federal Reserve rate hikes over the next 12 months. However, the impact of this 8:30 EDT release could be relatively muted for USD/CAD in particular. Why? Canada will release their employment numbers at 7:00 EDT, and this tends to be one of the biggest market-movers for the Canadian dollar.
Canadian Employment the Northern Equivalent Of NFPs
On the first Friday of each month, the entire Forex market typically suppresses volatility and direction until the top market-moving US non-farm payrolls release crosses the ticker. However, during certain months, the market takes in another major piece of event risk in the form of the Canadian employment change report. This indicator’s impact on the Canadian dollar is equivalent to the NFPs influence over the greenback; but the Canadian report has a greater surprise factor month-to-month owing to fewer supplementary employment reports leading up to the government numbers.
Looking at the official consensus among economists polled by Bloomberg, the net change in employment through last month will see a 10,000-person increase. This would be a considerable reversal from the 55,200 net job loss reported in the previous month – the biggest contraction since February of 1991. For fundamental perspective, a positive number would further help to offset the disappointing GDP numbers reported last month and curb the pessimism surrounding consumer spending forecasts. At the same time, the official outlook opens the market to a hefty potential for surprise as the average employment change over the past five years has been a 23,700 increase with incredible volatility between a range of 90,000 jobs added and 50,000 lost.
What to Expect from USD/CAD
There are a number of scenarios that could play out for USD/CAD after these two indicators hit the wires; but those situations where the numbers offer opposing surprises will produce the biggest reaction. Should non-farm payrolls come out better than expected (especially if the BLS reports a net increase) and the Canadian data disappoints with another significant cut in employment, the USD/CAD may generate enough momentum to break a four-year trendline that has set resistance around 1.0750. Should the opposite happen and US payrolls approach a 100,000-person drop while Canadian numbers grow more than expected, the test and pull back from a major 61.8 percent Fibonacci retracement around 1.08 may very well turn into a reversal.
These two cases represent the extremes for tomorrow’s data; but a significant fundamental shock will be needed to recharge direction from a pair that has turned to congestion after testing major resistance. A modest surprise from each or both figures, in-line readings or conflicting releases will have to be a discretionary call; but the cues will be there. With the Canadian data released a full hour-and-a-half before the main event NFPs, we will already have an idea of which direction the pair is leaning before the second wave hits. Volatility will be the most important component of tomorrow’s fundamental excitement, but a trading plan should be in place well in advance.
USD/CAD Weekly Chart
Charts Produced With FXTrek Intellicharts
USD/CAD Daily Chart
Charts Produced With FXTrek Intellicharts
Written by: Terri Belkas and John Kicklighter, Currency Strategists for DailyFX.com
Questions? Comments? You can send them to Terri and John at <[email protected]> or <[email protected]>.