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EUR/USD: Trading the US Change in Non−Farm Payrolls

Fri, Jan 9 2009, 06:07 GMT
by Daily FX Research Team

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U.S. Non-Farm payrolls are expected to contract another 510K in December after falling 533K in the previous month, which could trigger a selloff in the dollar as the unemployment rate is projected to reach 7.0%. Deteriorating fundamentals paired with fading demands from home and abroad have dragged on businesses throughout the second half of 2008, and the outlook for growth remains bleak as the labor market deteriorates at a record pace.

Trading the News: US Change in Non-Farm Payrolls

What’s Expected

Time of release: 01/09/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -525K

Previous: -533K

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

November 2008 US Change In Non-Farm Payrolls

U.S. Non-farm payrolls fell the most in 34 years as the world’s largest economy shed 533K jobs in November. In addition, the employment reading for October was revised sharply lower to -320K from an initial reading of -240K, which raised the number of total job losses in 2008 to 1.91M. The rapid deterioration in the labor market pushed the unemployment rate to a 15 year high of 6.7% from 6.5% in the previous month.
As the U.S. economy faces its longest recession in over a quarter century, conditions are likely to get worse, which foreshadows a dour outlook for the labor market. Meanwhile, President-elect Obama said that the rise in unemployment reflects the ‘urgent’ need for a stimulus plan in response to the significant downturn in the global economy, and plans to create 2.5M jobs over the next two years.

August 2008 US Change In Non-Farm Payrolls

The U.S. economy lost 240K jobs in October following a loss of 284K in the previous month, which raised the unemployment rate to a 14 year high of 6.5% from 6.1% in September.
Moreover, mounting job losses pushed the total number of unemployed workers to a 25 year high of 10.08M in October, and conditions may only get worse as demands from home and abroad falter. Deteriorating fundamentals have certainly stoked fears that the U.S. will ultimately face its most severe recession in 25 years. Despite the extraordinary efforts taken on by policymakers, fears of a protracted downturn has already raised bets that the Fed will continue to ease policy further over the coming months, and would lower the interest rate below 1.00% at the December 16th policy meeting.

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.

How To Trade This Event Risk

U.S. Non-Farm payrolls are expected to contract another 525K in December after falling 533K in the previous month, which could trigger a selloff in the dollar as the unemployment rate is projected to reach 7.0%. Deteriorating fundamentals paired with fading demands from home and abroad have dragged on businesses throughout the second half of 2008, and the outlook for growth remains bleak as the labor market deteriorates at a record pace. Job cuts in the U.S. surged to 274.5% from 148.4% in November, which raised the annual figure to 166,348, while the ADP employment report showed that private-sector jobs dropped 693K in December amid expectations for a 495K drop. Furthermore, the September reading showed an even greater loss from the initial reading of -250K as the revised reading confirmed a total job loss of 472K for the month. Meanwhile, the ISM manufacturing report showed that production in the U.S. slipped to its lowest level since 1980, while the employment component fell to 29.9 from 34.2. The data continues to reflect a dour outlook for the world’s largest economy, and conditions are likely to get worse as Alcoa, the largest aluminum producer in the U.S., announced earlier this week that they will eliminate 13,500 jobs, while EMC Corp. plans to cut 2,400 jobs worldwide, which will include 600 U.S. employees. Nevertheless, as the economy faces its longest recession in over a quarter century, the FOMC minutes showed that economic activity is anticipated to ‘fall much more sharply’ throughout the first half of the year than initially expected, and policymakers went onto say that the jobless rate is ‘likely to rise significantly into 2010.’ Despite the extraordinary efforts taken on by the Fed and U.S. Treasury, the gloomy outlook held by policymakers suggests that economic activity will remain subdued throughout the near-term as growth prospects deteriorate, and foreshadows the cumbersome tasks that President-elect Barak Obama will face as he comes into office.

Trading the given event risk clearly favors a bearish outlook for the U.S. dollar, but the slight improvement in the service-sector could help the economy to avoid a severe slump in the labor market. The ISM Services index increased for the first time in three months, which raised the employment component to 34.7 from 31.3, and leaves room for an enhanced NFP reading, which would support a rally in the greenback. As a result, if the employment data crosses the wires better-than-expected (less than -500K), we will keep an eye out for a red, five-minute candle following the release, which would support a short entry (long dollar) 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.

On the other hand, the preceding employment reports reinforces the likelihood for further weakness in the labor market, and a drop of more than 525K would favor a short dollar trade for the given event risk. Therefore, a dismal payrolls release would certainly favor a long EURUSD trade, and we will follow the same strategy as the short position mentioned above, just in reverse.

Published on  Fri, Jan 9 2009, 06:15 GMT

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