Trading the Non-farm Payrolls report – Make or break number for Fed Liftoff and Sterling

The September non-farm payrolls report due for release on Friday is expected to show the US economy added 200K jobs, with the unemployment rate unchanged at a seven-year low of 5.1%. Last month, the Bureau of Labor Statistics reported that the economy added 173,000 jobs. That was below Wall Street's expectation for 217,000. The August month, usually shows seasonal weakness and the numbers are often revised higher in September.

Key points worth noting heading into a September payrolls report

• A 25 basis point rate hike is seen happening only in March 2016

• It is quite clear by now that a “no fed rate hike” is being read by markets as a negative sign

• Markets do not seem to buy what the Fed’s Yellen and other policymakers are trying to sell about inflation and rate hike (despite upward revision of the Q2 GDP) -

Breakeven rate (The difference between yields on five-year notes and similar-maturity Treasury Inflation Protected Securities (TIPS), a gauge of expectations for consumer prices) is at a six year low

Despite Yellen reiterating a possibility of a rate hike this year, the CME Fed watch data indicates only 36% probability of a rate hike in December.

• Sterling appears the most vulnerable currency (dropping BOE rate hike bets), while heading into the US payrolls report.

Thus, it is quite clear that the non-farm payrolls print has to be far better than what is expected, in order to convince markets that a rate hike could indeed happen in December 2015. October, though being sold as a live event, is unlikely to provide a rate hike.

Only an NFP print above 250K or so could push up the December rate hike bets above 50.00 and stabilize the risk sentiment in the markets. A number around 200K would turn out to be a non-event for the markets, while an NFP print well below estimates could even throw March 2016 Fed rate hike bets out of the window.

Sterling likely to cheer a strong NFP figure

Sterling’s vulnerability to risk aversion/drop in commodity prices has become quite clear since the September Fed meeting. Risk aversion/financial market instability reduces the probability of the Fed and BOE rate hike. Also losses in commodities and mining shares – Glencore, weighed heavily on Sterling in the last few days. Thus, a strong NFP figure could stabilize markets, provide short-term relief to commodities and trigger correction in the cable.

Moreover, since the September Fed meeting, the BOE rate hike bets have dropped as well. In fact, markets now believe the BOE liftoff could happen in Q3 2016. Furthermore, markets also appear convinced that a BOE rate hike would only happen after the Fed liftoff, irrespective of the quality of the UK data. Consequently, a weak NFP figure not only leads to a drop in the Fed rate hike bets, but also pushes BOE lift-off further out in 2016. Thus, a stellar NFP figure could result in Sterling rally, especially against the commodity dollars and Asian/EM currencies.

• In case the NFP is strong – An initial dip in the cable is likely to be followed by a sharp rebound, especially since, Sterling is oversold on intraday charts and appears due for a technical correction. Sterling could perform, especially well against the commodity dollars and Euro.

• In case the NFP is weak/or prints in line with estimates – A minor technical recovery is likely to run into fresh offers opening doors for a possible break below 1.50 handle. Sterling likely to suffer against EUR, eventually leading to an inverted head and shoulder breakout as discussed here

GBP/USD – Charts point southwards

• The September month closing came well below 1.5185 (23.6% of July 2014-Apr 2015 plunge). The bearish closing was witnessed after sterling failed to sustain above 1.5568 (38.2% of July 2014-Apr 2015 plunge).

• Thus, the prospects of a further sell-off to 1.4950 (Jan 2015 low) are high. A daily close below 1.4950 shall open doors for a re-test of 1.4814 (March closing. However, the oversold conditions on the intraday charts may fuel a technical correction.

• In case the NFP is weak, a minor rally could run into offers in the range of 1.5350-1.5450.

• On the other hand, sterling could see a minor dip to 1.50, before rallying sharply to 1.55-1.5568 in case the strong NFP stabilized markets.