After worst jobless claims ever, how to trade non-farm payrolls

The US economy is in trouble and nothing shows that more than today's jobless claims report. Over 6.6 million people filed for unemployment benefits last week, doubling expectations. This was the worst claims report ever and reflects the dire state of the economy. While many investors anticipated a weak report and few were surprised by the 6 million print, the headline grabbing release drove USD/JPY lower. Yet other currencies such as the Australian and New Zealand dollars fell harder than the greenback as risk aversion seeped into the markets. The Dow Jones Industrial Average is poised for a negative open after giving up earlier gains. The tepid reaction in stocks is a sign that the surge in jobless claims was not a surprise – it was simply a matter of time before the data showed the true state of the labor market. Numbers like this puts the US economy at serious risk of recession especially as lockdown measures are extended to April 30th and will most likely extend well into May.

This Friday's non-farm payrolls report will be the first monthly labor market number to show the COVID-19 impact. Economists are looking for only –100K decline in payrolls because like ADP, NFPs are measured as of March 12th. The first statewide stay at home order was not issued by California until March 20th and quickly spread across the nation in the days that followed. By the end of March millions of US businesses were shuttered but may not have laid off their employees until the end of the month. As a result, we will not see the full extent of the damage until revisions are released next month and the April numbers will be ugly.
 

With that in mind, how should non-farm payrolls be traded?

First it is important to remember that average hourly earnings and the unemployment rate are just as important as payrolls. In addition to a forecasted -100K drop in NFP, the unemployment rate is expected to jump to 3.8% from 3.5% while average hourly earnings growth should slow to 0.2% from 0.3%. USD/JPY will be the most sensitive to these numbers but there could be other opportunities as well. If non-farm payrolls falls by -100K or less and the unemployment rate declines to 3.7% or better the dollar will rally but the gains should be short-lived as investors eye any good numbers with skepticism. Selling USD/JPY on a bounce should be the right move. If NFPs falls by more than -100K and the unemployment rate soars with weaker earnings, USD/JPY should be sold as well but the extent of the slide will hinge upon how much payrolls decline. A weak NFP number should also drive all of the Japanese Yen (JPY) and Swiss Franc (CHF) crosses lower. Our preferred currency pairs will be EUR/JPY and CAD/JPY.

One of the weakest currencies this morning is euro which is not a surprise given the COVID-19 impact on the economy. Spain reported its biggest rise in jobless claims ever. France said 4 million workers are temporarily unemployed and according to a European Union official, each month of lockdown shaves 3% off annual GDP. Tomorrow's Eurozone PMI numbers will most likely to be revised lower. Investors are also bracing for weaker retail sales and construction PMI from Australia. Despite a sharp rally in oil prices and much better than expected trade numbers the Canadian dollar extended its slide today. Investors are hoping for Saudi cooperation on stabilizing the oil market but its not clear whether that will happen.