Nonfarm Preview: March 2015

With ECB announcement of QE behind us the markets will now shift their attention to US Nonfarm Payroll data.

Whilst the markets frequently refer to Nonfarm Payroll, it is in fact a data set of several employment figures. The markets care because it is one of the key data sets used by the FED to aid monetary policy decision. With an expectation of FED to raise rates in June this year and using labour market conditions and growth to monitor the progress of this likelihood, then employment data is as important as ever as traders speculate on the likelihood of the FED raising rates.

The chart above compares actual NFP to expectations, with a positive reading denoting above expatiations and a negative number denoting below expectations. Using two years of data we can see overall the trend is rising, meaning NFP is surpassing expectations and we are a gloomy bunch when it comes to forecasting. Whilst this trend overall is expected to continue we also have to keep in mind that a negative numbers (below expectations) is likely to cause more of a stir with the markets becoming accustomed to above-expectation job growth.

Using the last 95 data points, I have compared NFP expectations to the actual, rounded off to the nearest 20k (above or below expectation).

So using the above data we could assume that:
- 48.5% probability of NFP coming either above or below expectations by 40k
- 30.5% probability of 60k above expectation
- 20% probability of 80k above expectations
- 9.5% probability of being -100k from expectations

Observations/Assumptions:
- Above expectations gets extra weighting (which shows we have had gloomy expectations, overall)
- A higher deviation from expectations is less frequent, which should assume in a larger move
- Deviation below 40k above or below is not likely to cause much of a reaction
- Ideally looking for moves over 80k deviation from expectation for sustainable move

USD INDEX:

I have used the USD Index as a proxy for tonight's employment data. The key levels above are what I would use to plan TP, SL and reversals but it is the data set which will dictate how far, clean or the direction it moves.

Currently near 11-year highs and propped up by Eurozone QE then in simple terms, strong NFP data should push to new highs and weak data should see it retrace. It then comes down to how far away from expectations the data set is as to how large or sustained a move may be. If the data set is mixed (good and bad) and not too far from expectations then we can expect choppy and relatively small moves. If we some the data set unanimously in favour of US and well above expectations, we can assume a more direct upside move. By using a combination of the deviation from expectations and which data set is above or below we can make assumptions of the likely trend and duration.

Currency pairs to consider:
- USDJPY (Long for strong NFP data, short for weak data)
- EURUSD short (if strong employment to take advantage of QE and payrolls)
- Gold long (if soft data from employment)
- USD Index ​
- Oil (WTI, Brent)
- Oil (WTI, Brent)