Dollar - How to Trade Non-Farm Payrolls

• Euro Jumps on Pre-NFP Position Adjustments
• GBP: How to Trade the UK Election 
• AUD Hits 5.5 Lows on Rate Cut Bets
• CAD Rallies as Trade Deficit Narrows
• NZD Lifted by Higher Commodity Prices

Dollar - How to Trade Non-Farm Payrolls on Good Friday

Many people are warning that this month's non-farm payrolls report could cause an unusually volatile reaction in the financial markets because Friday is a global holiday and many trading centers are also closed on Monday. Forex is the only market open but liquidity will be thin because many traders are off celebrating Easter, Passover or enjoying the long weekend holiday. However that does not mean that EUR/USD and USD/JPY will have an abnormal reaction. 

In the past 15 years, there has only been 3 times that non-farm payrolls was released on Good Friday, and each of those 3 times, the reaction in these 2 currencies was just as you would expect. In 2012, only 120k jobs were created versus 205k expected. USD/JPY fell as much as 120 pips and the EUR/USD rose approximately 60 pips. In 2010, only 162k jobs were created versus expectations for 184k rise, but the dollar still traded higher versus the yen and euro because it was the largest increase in 3 years. In 2007 an improvement in the unemployment rate and stronger payrolls drove the dollar up 70 pips versus the yen and euro. For USD/JPY the move was consistent with very little retracement by the end of the North American trading session. The EUR/USD on the other hand experienced its usual V-shaped reaction shortly after the release. In each case, all of the price action happened in the first 90 minutes post NFPs with quiet consolidation in the hours that followed. There was also zero follow through on Monday, with EUR/USD and USD/JPY trading in very tight ranges in all 3 years. So the best way to trade NFPs is to either catch the initial reaction, take a view beforehand or wait until the markets reopen on Tuesday. 

This month's non-farm payrolls report is especially important because the dollar has pulled back and investors are divided on when the Fed will raise rates. If the labor market report is strong, it will harden the case for a summer rate hike and revive the rally in the U.S. dollar. However if job growth falls short of expectations, the dollar could extend it slide against most of the major currencies. We believe that the labor market continued to improve in the month March but after a strong February report, slower job growth is likely. We also don't have the luxury of seeing how job growth in the service sector fared this month as the ISM non-manufacturing is not scheduled for release until next week. Nonetheless the decline in the ADP employment change and drop in the employment component of manufacturing ISM points to weakness in the labor market whereas the improvement in jobless claims and continuing claims signal strength. What is also interesting is that in 3 out of the last 3 years, March non-farm payrolls fell short of expectations. Taking everything into consideration, we believe that payrolls will fall short of the market's 245k forecast. Yet the dollar will also be influenced by changes in the unemployment rate and average hourly earnings. So if earnings rise or the unemployment rate improves, it could limit the losses in the dollar if the absolute amount of job growth falls short of expectations. Here's a quick look at the arguments for weaker and stronger payrolls: 

Arguments for Weaker Payrolls

1. February was a STRONG number
2. ADP Drops to 14-Month Low
3. University of Michigan Confidence Drops to 93 from 95.4
4. Employment Component of ISM drops to 50 from 51.4

Arguments for Stronger Payrolls

1. Challenger Job Cuts Rise 6.4% vs. 20.9% in Feb
2. Jobless Claims 4 Week Average drops to 285k 
3. Continuing Claims drops to 2.32 million from 2.4 million
4. Consumer Confidence Index jumps to 101.3 from 98.8

Euro Jumps on Pre-NFP Position Adjustments

The euro rose as much as 1% intraday ahead of the U.S. non-farm payrolls report. With the holiday looming, many traders decided to unwind their short positions after taking them to record levels last week. No Eurozone economic reports were released today but progress on Greek reforms helped to lift the currency. The Eurogroup has called a meeting after the Easter holiday on April 8 and April 9th. Chances are they will be discussing Greece, which means that headlines related to the country's debt troubles will continue to plague the currency in the coming week. The European Central Bank also released the minutes from their most recent monetary policy meeting today and even though the central bank reiterated its commitment to keeping stimulus in place for as long as needed, the report had very little impact on the euro. 1.1050 remains the key resistance level for the currency and we will be selling into that level if tomorrow's U.S. NFP report drives EUR/USD higher.

GBP: How to Trade the UK Election 

EUR/GBP traded sharply higher today but that was due entirely to euro strength as sterling ended the day unchanged versus the U.S. dollar. Earlier, the pound sold off on weaker construction sector activity but it recovered during the U.S. session and ended the day unchanged. While the U.K. general election is a month away it is already having a major impact on the British pound. The election is anything but a sure thing and sterling has been under pressure because of the fear that the Conservative Party will fail to win enough seats. We expect the British pound to fall further in the weeks ahead with GBP/USD falling to a fresh 4 year low after the election. What makes this election different from 2010 is the potential power grab by smaller parties that could lead to more difficulty in forming a coalition. If this leads to a hung parliament it will translate into more losses for the currency. Sterling 3 month option volatiles are at a 3-year high but it could rise even further like it did in 2010. Five years ago volatility jumped to 17% in the days after the election and not only did GBP/USD fall 400 pips on election day but it dropped another 500 pips in the 2 weeks that followed. 

AUD Hits 5.5 Lows on Rate Cut Bets

The Australian dollar fell to a fresh 5.5 year low despite stronger trade numbers on growing expectations of a rate cut by the Reserve Bank of Australia next week. The weakness was broad based with AUD/NZD falling to a fresh record low. Between the slowdown in the Chinese economy and the decline in iron ore prices, the RBA has every reason to lower rates if they choose to do so. However 50bp of easing in 2015 could be enough. The Canadian and New Zealand dollars traded sharply higher with the loonie benefitting from stronger trade numbers. Their deficit shrank to 980 million from -1.48B in the month of February. Yet oil prices continued to fall and that could catch up to the loonie in the next few days. Meanwhile the New Zealand dollar shrugged off the decline in dairy prices to trade higher on the back of an increase in the ANZ commodity price index.