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 8.7% Previous 8.6%
ACTION: 220K BUY AUDJPY / 80K SELL USDJPY
The Trade Plan
Todays NFP Employment Change release is forecasted at 150K. The ADP employment report revealed a much better private job growth rate in December as results of the rising in temporary holiday hiring. The Unemployment Rate is expected to remain below 9.0% at 8.7%. If we get a significantly lower release on the NFP (80K or worse) and slightly higher Unemployment Rate (9.0% or worse), I´d be looking to Buy JPY or SELL AUDJPY, EURJPY, even GBPJPY on retracements. On the other hand, if we get a positive NFP release (220K or better) and the Unemployment Rate remains below 9.0% at around 8.7% or so, JPY should weaken immediately as AUD/JPY may recover and move above the 80 level throughout the trading session… (Note other JPY pairs would react the same way as AUDJPY, therefore you could also look to trade GBPJPY and EURJPY).
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 previous analysis stated: “…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.”
However, with this week’s ISM PMIs predicting better sentiment, combined with the surprise ADP release of 325K private jobs created, we could definitely see some pre-risk appetite moves during the overnight trading sessions, and perhaps some “buy on rumor sell on news” market reaction if we get an inline with expectation release…
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 325K new jobs in August, instead of 176K. (Positive)
- ISM Manufacturing PMI came out at 53.9 vs 53.3 while Non-Manufacturing PMI came out at 52.6 vs 53.0 expected. (Neutral)
- 4 – week Unemployment Claims show that unemployment is around 373K, below the 400K threshhold, the lowest since Jun 2008, and likely to keep Unemployment Rate below 8.7% (Positive)
- Challenger Gray & Christmas Job Cuts report showing inline with expectation scheduled job cuts compared to November 2011. (Neutral)
- Record Holiday sales (despite of earning) are likely to help jobs number today due to temporary hirings. (Positive)
- Record Automobile sales in the U.S. towards the end of 2011: Ford sales rose to 11% in December, compared to Chrysler’s sales at 37%, and GM’s sales of 4.5%, totalling 581,817 cars or light trucks sold in December. (Positive)
Most likely than not, we’ll get a better release, considering there aren’t much negative factors to consider… However, market is already expecting a better release so on an inline or less than expected release, we will see some ‘buy on rumor, sell on news’ market action and USD will probably be sold off against other safe-haven currencies such as CHF and JPY…
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 50K). 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 creep up slightly to 8.7%. 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 favorite son on either scenario, especially when you compare it with European currencies. Therefore, I would definitely recommend to use my CSM (Currencystrengthmeter) to gauge market reaction and choose the best pair to trade… You can download the meter for free at CURRENCY STRENGTH METER official site.
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.