Trading Event: US Non-Farm Payroll Data, June 2013

There has been much anticipation of the release of June's employment situation report by the Bureau of Labor Statistics, due to the recent market volatility - especially after Fed chairman Ben Bernanke, during last month's FOMC meeting, indicated that the central bank is considering turning the tap off the on-going $85 billion a month asset purchase program at some point later this year. Ever since the QE3 stimulus program was initiated by the Federal Reserve, during last September, investors have been on an aggressive stock buying spree, which continued through the majority of the first half of 2013, when the major indices reached record levels on May 22nd 2013; with Dow index touching 15542 points while the S&P 500 at 1687.

Since then rumors of the Fed strategizing the stimulus exit have created volatility in the market, which continued to gather strength, when the Fed eventually confirmed that it would indeed scale back the on-going stimulus, later this year. Investors reacted sharply to this shocker by the Fed, and most investors opted to take the profits and stayed out of the market, awaiting the non-farm payroll figures for June and the unemployment percentage levels, in order to get further clarity on whether there is any possibility that the Fed would delay its tapering plans.

The below are the consensus forecast for the employment situation for the month of June 2013.
Non-farm payrolls: +165k
(May +175k)
Private payrolls: +175k
(May +178k)
Unemployment rate: 7.5%
(May 7.6%)

On Thursday, the much awaited policies of the two influential central banks, the Bank of England and the European Central Bank, eased investor nerves which saw the central banks maintain their current policies. Following the footsteps of BoE governor Mark Carney, earlier in the day, the ECB president Mario Draghi, also embraced forward guidance policy, promising to "keep the interest rates low for an extended period of time" also assuring an accommodative monetary policy, for as long as necessary; to maintain balance between the inflation and the economic growth. The ECB made their intentions clear as to what is going to be their "two pillar strategy" oriented policy - achieving price stability, striking balance between the inflation and monetary dynamics.

Given the recent political uncertainties in Europe, owing to fresh fears from the political uncertainties of Portugal and Egypt and mixed economic indicators out of the Eurozone and Britain, the ECB and the BoE monetary policy decisions are welcome and will be a great relief for the investors, as this will buy enough time for the member countries, to sort out their internal issues and seek continued assistance from the central banks in the months to come, keeping up on the gradual recovery phase. The easing measures undertaken by the Bank of Japan, over the past few months and the Peoples' Bank of China, who hinted on intervening, if the current credit crunch demanded so, further supports the global central banks' strategy in the months to come.

Investors will hope for a similar thinking from the Federal Reserve on the monetary policy and will hope the Fed may review their statement on tapering, made during the previous FOMC meeting. The Fed will be keeping a close eye on Friday's job report, before they could provide further direction on the future monetary policy.

So how to trade this event?

There are mainly two possible outcomes investors should be prepared for in order profit from this event:

1. NFP data comes well below the estimates, disappointing the market with unemployment rate unchanged at 7.6%:

Any weakness in the NFP data below the consensus of 165k could potentially see the dollar move downwards and the EUR/USD and GBP/USD could find traction although upward momentum to the Euro and Sterling remains limited in the medium term, thanks to the forward guidance issued by the ECB and the BoE, during the central bank policy meetings on Thursday, promising to maintain lower interest rates as long as necessary, until the economy improves considerably. The US Stock market reaction is going to be a tricky affair. In a normal scenario, the reaction for any disappointing NFP reading, would be a total sell off. However, given the recent comment made by Bernanke on scaling back the stimulus later this year, the investors may feel this situation as something which could delay the Federal Reserves' stimulus unwinding strategy. Consequently, the stock markets may be on the upside with limited gains, and the VIX, settling down to the normal levels, as investors would likely bet that the Fed would follow the footsteps of the Bank of England and the European central bank and maintain low interest rates and an accommodative policy for an "extended period of time" as stressed by the ECB.

2. Better than estimated Payroll data with unemployment rate falling to 7.5%:

This scenario is going to be a disaster for the euro and sterling against the greenback as they will find intense sell off pressures from the investors. The stock markets likely to shoot up sharply, with investors ignoring Bernanke's stimulus scaling back comments last month, and likely to think that before making any decisions to unwind the $85 billion monthly stimulus, the Fed may want to confirm i) the consistency in the employment growth setting a target level, say below 7% and ii) until the US GDP, which disappointed in the first quarter (revising down to 1.8% from 2.4%), moves up quite considerably during at least the next couple of quarters, confirming any steps considered towards QE tapering, will depend largely on how the above two factors perform in the coming months.