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U.S. Non−Farm Payrolls on Tap − Will the Dollar Reverse Course?

Fri, Nov 7 2008, 07:01 GMT
by Daily FX Research Team

DailyFX

U.S. Non-Farm payrolls are expected to contract another 200K in October, and will certainly drive price action for the greenback as NFP’s are considered to be a top market mover in the currency market. Fading growth prospects paired with the slowdown in the global economy has certainly taken a toll on businesses, and conditions may only get worse as fears of a global meltdown intensify.

Trading the News: US Change in Non-Farm Payrolls

What’s Expected

Time of release: 11/07/2008 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -200K

Previous: -159K

Impact of the US employment report had on EURUSD through the past 3 months

September 2008 US Change In Non-Farm Payrolls

Employment opportunities in the U.S. weakened as the economy lost jobs for the ninth consecutive month in September. Non-Farm payrolls slipped 159K from August to record its biggest decline in five years as fading growth prospects pushed firms to cutback on employment. The ongoing downturn in the housing sector paired with the credit crunch has certainly taken a toll on the world’s largest economy, and conditions may only get worse as the U.S. heads into a recession. Moreover, fading demands from the global economy has also spurred increased concerns for growth, and the Fed could be forced to increase their efforts over the coming months in order to avoid a severe slowdown in the economy.

August 2008 US Change In Non-Farm Payrolls

U.S. payrolls declined for the eighth consecutive month, which led the unemployment rate to surge to a five year high of 6.1% from 5.7% in July. The economy lost 84K jobs during August, which was much greater than the 75K decline expected by economist. Fading employment demands suggests that the downturn in the economy may last longer than the FOMC had initially anticipated, and conditions may only get worse as home values tumble lower while consumers continue to face higher living costs. Meanwhile, the dour outlook for the world’s largest economy has certainly left the Fed in a tight spot, and may lead the central bank to hold a neutral policy going forward.

July 2008 US Change In Non-Farm Payrolls

The U.S. economy lost jobs for a seventh month in July leading to a an increase in the unemployment rate to 5.7% from 5.5% the month prior. Employers reduced their payrolls by 51,000 which was less than the 75,000 that was estimated. The total cuts for the year climbed to 463,000 as the subprime crisis continues to drag on the economy, The deteriorating labor market figures to keep the Fed on hold, preventing them from raising rates to battle rising inflation. The better than expected results led to an immediate dollar bullish price reaction. However, the improvement wasn’t better than the 40,000 we called for in the last report. Therefore, we didn’t trade the release, avoiding a loss of 50 points.

How To Trade This Event Risk

U.S. Non-Farm payrolls are expected to contract another 200K in October, and will certainly drive price action for the greenback as NFP’s are considered to be a top market mover in the currency market. Fading growth prospects paired with the slowdown in the global economy has certainly taken a toll on businesses, and conditions may only get worse as fears of a global meltdown intensify. Economic activity has deteriorated drastically during the second half of the year as the ISM Manufacturing index plunged to 38.9 from 43.5 in September to record its lowest reading since 1982. In addition, the employment component dropped to 34.6 from 41.8, while new orders slipped to a 28 year low of 32.2 from 38.8. Moreover, service-based activity, which is one of the two the biggest drivers of growth, reached a record low in September reflected by the decline in the ISM Non-Manufacturing index. Weakening demands from the domestic economy, as well as from abroad, has clearly dragged on firms, and employment opportunities may become increasingly scarce as businesses continue to cutback on workers.
Just yesterday we saw the Challenger Job Cuts index surge to a five year high of 78.9% from 32.6% in September, while the ADP Employment index showed that the economy lost 157K jobs in October despite expectations for a 102K decline. The data suggests that firms are cutting payrolls at a faster pace than initially expected, and has already raised expectations that NFP’s will fall more than 200K as the ADP report tends to play down the underlying weakness in the labor market. Meanwhile, the dour outlook for the U.S. continues to fuel expectations for further easing by the Fed, which would only drag on the dollar going forward. Fed Fund futures are showing that investors have already priced in a 87.5% chance of a rate cut at the December 16th meeting, while they expect a 12.5% chance that the MPC will hold the benchmark interest steady at 1.00%. However, Credit Suisse overnight index are showing that market participants anticipate the FOMC to raise the key rate by at least 25bp over the next 12 months. Mixed sentiment amongst investors suggests that volatility for the U.S. dollar could spike following the payrolls report, and a larger-than-expected decline in NFP’s would certainly raise the scope for additional rate cuts to follow over the coming months.

Trading the given event risk clearly favors a bearish outlook for the U.S. dollar, but an enhanced NFP reading could support a rally in the greenback as the reserve currency continues to benefit from its safe haven status. As a result, a less-than-expected fall in payrolls would set the stage for a bullish dollar trade, and a red, five-minute candle following the release would support a short entry on two lots of EURUSD. Once these conditions are met, we will place our initial stop above the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

However, the chances of an improved NFP reading remains bleak as the slew of employment data this week showed the ongoing weakness in the labor market. Therefore, a dismal payrolls release would certainly favor a long EURUSD trade, and we will follow the same strategy as the short mentioned above, just in reverse.

Published on  Fri, Nov 7 2008, 07:11 GMT