We´ll be trading the US NFP (Nonfarm Payroll) Employment Change, it is the focus news release for the week. Here´s the forecast:
8:30am (NY Time) US NF Employment Forecast 150K Previous 120K
8:30am (NY Time) US Unemployment Rate Forecast 8.5% Previous 8.5%
ACTION: 220K SELL EURUSD / 80K BUY EURUSD
The Trade Plan
Todays NFP Employment Change release is forecasted at 150K. The ADP employment report came out slightly worse than expected at 170K vs 190K. The Unemployment Rate is expected to remain at 8.5%. If we get a significantly lower release on the NFP (80K or worse) and slightly higher Unemployment Rate (8.7% or worse), I´d be looking to BUY the EURO, or go long on EURUSD. On the other hand, if we get a positive NFP release (220K or better) and the Unemployment Rate remains below 8.5%, USD should strengthen immediately and I would SELL EURUSD.
If we get a conflicting release, then well wait and see how the market reacts first. If there is an overwhelming sentiment driving the market, well get plenty of opportunities for an entry if we just wait for 5 minutes after the release; you´ll get a much clearer view.
Please read my detailed trading strategy for this release below.
The Market
Most analysts believe that today’s NFP release will be positive, but there is still a long way to go before these job gains start to impact the overall economy, and as previously mentioned:
”…many analysts agree that in order to see 0.5% drop in unemployment rate, we’ll need to have a minimum average of 150K new jobs created monthly for an entire year, which explains why the Unemployment Rate remains at around 9.0% for the longest period since 1948.”
Here are some positive/negative points to consider today’s NFP release:
- Wednesday´s ADP employment report showed that the private sector created a net of 170K new jobs in January, instead of 190K. (Negative)
- ISM Manufacturing PMI came out at 54.1 vs 54.6. (Neutral)
- 4 – week Unemployment Claims show that unemployment is around 373K (same as last month), which supports the unchanged forecast of the Unemployment Rate at 8.5% (Neutral)
- Challenger Gray & Christmas Job Cuts report showing slightly higher with expectation (53.5K vs 41.8K prior) scheduled job cuts compared to December 2011.(Negative)
- Estimated 40,000 temporary workers hired by Fedex and other delivery companies are expected to be dismissed this month.(Negative)
- Various manufacturing companies are expected to hire this month, including Norfolk Southern Corp, second biggest railroad in the Eastern U.S. (Positive)
Most likely than not, we’ll get an inline with expectation release, since the forecast is very conservative to begin with, 150K headline forecast and 168K private payroll, which corresponds to the ADP release on Wednesday.
NFP Trading Strategy
Let´s talk about how to trade this release: We´ll wait for the numbers to come out but continue to hold on a trade, Even if we get our tradable figures (220K to 80K). Wait for a possible revision of the previous release number of 0K as the market usually overreacts with the Revision and chances favor that a solid trade will present itself if we dont get a conflicting releases between the revision and the actual release; at this point, still stay out of the market.
Then the next step is to wait for the Unemployment Rate, which is expected to remain unchanged at 8.5%. If the Unemployment Rate were to surprise higher, were faced with an imperative decision at the time of the release.
After all of the numbers have been released, wait for the market to push and wait patiently for a decent retracement before getting in. Look for recent support/resistance areas for entry as a high impact news with various components are extremely volatile, and those who are patient will always get a chance to enter with a much better entry.
Additional Thoughts
USD is likely to be the focus today, and EURUSD should be the main pair to trade. Last NFP was the first time in a long time that the market decided to trade in the direction of the news instead of risk sentiment, therefore I believe today’s release will be the same…
Pre-News Consideration
I strongly suggest that any pre-news trade be closed at this moment. As with NFP releases, liquidity will die down from now until the actual release time because most traders are likely to sit on the sideline. However, with that being said, we could see some buying of USD based on the assumption above.
DEFINITION
Measures the change in number of employed people during the previous month, excluding the farming industry. A rising trend has a positive effect on the nation´s currency. Job creation is an important indicator of economic health because consumer spending, which is highly correlated with labor conditions, makes up a large portion of GDP. This report is the first of the month that relates to labor conditions, making it susceptible to big surprises.