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Trading News Report

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EUR/USD: Trading the Non−Farm Payrolls Report

Fri, Mar 6 2009, 05:53 GMT
by Daily FX Research Team

DailyFX

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to drop 650K in February, which would be the biggest contraction in employment since 1949, while the jobless rate is expected to reach a 25-year high of 7.9% during the same period as firms continue to slash their labor force in an effort to reduce costs.

Trading the News: US Change in Non-Farm Payrolls

What’s Expected

Time of release: 03/06/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -650K

Previous: -598K

Impact the US NFP report had on EURUSD through the last 2 months

January 2009 US Change In Non-Farm Payrolls

Payrolls in the U.S. fell 598K in January, which was the biggest monthly decline since 1974, and raised the annual rate of unemployment to a 16-year high of 7.6% from 7.2% in the previous month. As fears of a deepening recession intensify, firms are likely to cutback on production and employment in an effort to reduce costs, and the labor market is expected to weaken further throughout 2009 as the world’s largest economy faces its worst financial crisis since the Great Depression. The data certainly reinforces the dire state of the economy, and fears of a prolonged economic downturn is likely to stoke increased pressures for the U.S. Congress to approve President Obama’s $900B stimulus package, which should help to mitigate the downside risks for growth, but as the banking sector remain under pressure, the outlook for improved growth remains bleak.

December 2008 US Change In Non-Farm Payrolls

The world’s largest economy shed another 524K jobs in December to raise the 2008 total to 2.589M, which raised the jobless rate to a 15-year high of 7.2% from a revised reading of 6.8% in November, and marked the biggest annual contraction in employment since 1945. Meanwhile, the FOMC lowered their outlook for growth as the central bank projects unemployment to ‘rise significantly into 2010,’ and as signs of a deepening recession emerge, policy makers may continue to step up their efforts in order to soften the landing of the economy.
Nevertheless, as President-elect pledges to save or create 3M jobs over the next two-years, efforts by the new Administration could certainly help to mitigate the downside risks for growth, but may have little or no impact on the real economy as it faces its longest recession in a quarter century.

What To Look For Before

The Release Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast non-farm payrolls to drop 650K in February, which would be the biggest contraction in employment since 1949, while the jobless rate is expected to reach a 25-year high of 7.9% during the same period as firms continue to slash their labor force in an effort to reduce costs. The ISM manufacturing report for February showed that the employment component fell to its lowest level since recordkeeping began in 1948, while the ADP labor report released earlier this week showed that private-sector employment dropped another 697K during the same period after falling 614K in the previous month. Furthermore, jobs cuts in February increased 158.49% after rising 222.40% in the previous month, and the labor market is likely to weaken further throughout the year as the world’s largest economy faces its worst economic slump in over a quarter century. The preliminary GDP reading for the U.S. showed that the annual rate of growth slipped 6.2% in the fourth quarter, which is the biggest economic contraction since 1982, and the data continues to reinforce fears of a deepening recession as households turn increasingly pessimistic towards the economy. A report by the Conference Board showed that consumer confidence fell to its lowest level since recordkeeping began in 1967, which foreshadows a weakening outlook for private-spending, and the outlook for improved growth remains bleak as turmoil in the banking sector intensifies. Meanwhile, as the FOMC holds a dour outlook for growth and inflation, and is expected to hold the benchmark interest rate at the record-low for ‘some time’, the unprecedented use of the central bank’s balance sheet paired with the rise in the government’s budget has stoked fears that the aggressive measures taken on by policy makers could pose threats for long-term stability, which could weigh on the appeal of the greenback however, as risk sentiment continues to dictate price action in the currency market, the U.S. dollar is likely to hold its bullish trend over the near-term as the reserve currency continues to benefit from safe-haven flows.

Expectations for a 650K drop in employment clearly favors a bearish outlook for the dollar, but the unexpected rebound in service-sector employment has left the door open for an enhanced NFP reading. Therefore, if payrolls fall less that 600K, we will look for a red, five-minute candle following the event to confirm a sell entry on two lots of EURUSD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the second lot to breakeven once the first trade reaches its target.

On the other hand, the Fed’ Beige Book stated that the central bank has seen ‘rising layoffs’ and an increase in unemployment throughout the region, which only reinforces expectations for a dismal payrolls reading. As a result, an in-line print or a drop of more than 650K in jobs will lead us to short the dollar, and we will follow the same strategy for a long euro-dollar position as the short trade listed above, just in reverse.

Published on  Fri, Mar 6 2009, 06:52 GMT