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 205K Previous 227K.
8:30am (NY Time) US Unemployment Rate Forecast 8.3% Previous 8.3%.
ACTION: 275K SELL EUR/USD / 135K BUY EUR/USD.
The Trade Plan
Todays NFP Employment Change release is forecasted at 205K. The ADP employment report came out slightly better than expected at 209K vs 205K. The Unemployment Rate is expected to remain at 8.3%. If we get a significantly lower release on the NFP (135K or worse) and slightly higher Unemployment Rate (8.4% or more), I'd be looking to BUY the EUR/USD, AUD/USD, or go long on GBP/USD . On the other hand, if we get a positive NFP release (275K or better) and the Unemployment Rate remains ator below 8.3%, USD should strengthen immediately and I would SELL EUR/USD and AUD/USD.
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, we'll get plenty of opportunities for an entry if we just wait for 5 minutes after the release; you'll get a much clearer view.
The Market
Most analysts believed that Friday's NFP release would be positive, but there is still a long way to go before these job gains start to impact the overall economy. As a matter of fact, the focus for today’s NFP release may not rest on the figure itself, but perhaps on the future direction of the Federal Reserve’s monetary policy, or QE3…and in order to address that, let’s first look at some positive/negative points on today’s NFP release:
- Wednesday´s ADP employment report showed that the private sector created a net of 209K new jobs in March. (Positive)
- ISM Manufacturing and Non-Manufacturing PMI’s Employment Indices showed above 56 reading, on both PMI’s. (Positive)
- 4-week Unemployment Claims show that unemployment is around 355K, down from 376K average in March. (Positive)
- Better Consumer Confidence readings and Bloomberg’s Consumer Comfort Index at 4 year highs. (Positive)
As you can clearly see, all usual data are pointing to an above 200K NFP release…however, as stated before, the market is more concerned with the question “To QE3, or not QE3?” than the actual NFP release, although a strong NFP will certainly diminish QE3 speculation, while a weak NFP release will add to it.
Therefore, I believe in a strong NFP release, where the jobs market maintains its trend of improvements, USD will probably see strong contrast against European currencies (EUR, GBP, CHF), and moderate gains against commodity currencies (AUD,NZD, CAD) and JPY. On a weak NFP release, depending on the actual figure, we could see weakness in the USD against all other majors, as weak employment and the possibility of QE3 dominate market sentiment…I believe we may see strong gains in the EUR, GBP, AUD, CHF, NZD and modest gains in CAD and JPY…of course with EUR and possibly AUD being the biggest winners…Of course JPY crosses such as GBP/JPY, EUR/JPY, and even AUD/JPY should all fare very well.
Observation
An interesting observation for Friday could be on the CAD/JPY pair, as crude oil and the proximity to the U.S. have added constant support for the pair, not mentioning Thursday’s blowout figure on the CA Employment Change, with JPY likely to depreciate more and with a possibility of further stimulus to be introduced next week, I believe CAD/JPY may be a great pair to go LONG either way, since a bad NFP is likely to help risk sentiment and make CAD a perfect alternative currency for USD, while a good NFP will add to the strength in CAD and weakness in JPY. Of course you may have to give this trade a bit of room and time, but I believe it will hit 85 in the next couple of weeks
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 (280K to 140K). 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 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 8.3%. If the Unemployment Rate were to surprise higher, we are 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 EUR/USD 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.