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A Suprise Reaction to the NFPs?

Last updated 2/5/2010 5:24 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Risk Averrsion reigns ahead of NFP as key levels broken
• UK PPI much hotter at 2.0%
• Asia and Europe sharply lower in wake triple digit losses in Dow (Dow breaks 10,000 in overnight trade)
• Oil below $73/bbl
• Gold near weeks lows at $1050/oz

Overnight Eco

• AUD AIG Construction Index 57.7 vs. 49.3
• JPY Leading Indicators 94% vs. 93.7%
• EUR French Trade Balance -138.0B vs. -143.3B
• EUR German Industrial Production n/a
• GBP PPI Input 2.0% vs. 0.7% expected
• GBP PPI Output 0.4% vs. 0.3% eyed

Event Risk on Tap

• CAD Employment Change expected at 15.3K
• CAD Unemployment Rate expected at 8.5%
• USD Non-Farm Employment Change expected at 20K
• USD Unemployment Rate expected at 10.0%
• USD Average Hourly Earnings expected at 0.2%

Price Action

• USD/JPY nears 89.00 as risk liquidation continues
• AUD/USD holds support at 8640 with eco data helping
• GBP/USD breaks 1.5700 on risk jitters
• EUR/USD fresh multi month lows at 1.3655 as selling relentless on EUR/JPY crosses but bounces as night wears on

Another volatile night of trade in the currency markets with EUR/USD making fresh multi month lows as risk aversion reigned supreme ahead of US NFP report at 13:30 GMT. The EUR/USD dropped below the 1.3650 level for the first time since May of 2009  as relentless  selling in EUR/JPY cross amidst very thin market conditions exacerbated the moves.

Risk aversion was the predominant  theme of the European open with several capital markets breaking key levels  as gold tumbled below $1050/oz and Dow futures sliced through the 10,000 level. The fear of sovereign debt crisis continues to hang over the currency markets  and as we stated in our earlier piece the G-7 meeting which will take place this weekend is unlikely to soothe investors as policy makers have no credible options to implement any meaningful fiscal reform.

We wrote earlier, “One of the key problems facing G-7 policymakers is that the economic rebound of 2009 has not yet translated into any pick up in labor demand with is essential for any deficit containment. A rise in employment would reduce fiscal outlays for jobless payments and at the same time increase tax revenue. Until this dynamic is in place any attempts at deficit reduction are likely to be only cosmetic in nature, which is why today’s NFP data will be critical to the near term direction of risk assets.”     

Our colleague  Kathy Lien noted that 7 out 10 leading indicators that we the track for  the NFP report show a possible improvement in the data, but the question is by how much.  A modest improvement that will still leave NFPs in negative territory is unlikely to provide much lift to risk assets indicating that the economic recovery remains tepid. On the other hand a push above the zero line into positive territory would not be a encouraging sign for future growth but a massive psychological boost to the recovery bulls suggesting that US labor markets may have finally stopped contracting.

Given the lackluster weekly jobless claims numbers and the very modest rise in the employment subcomponent of ISM Non Manufacturing report we remain very guarded about the NFP print. Furthermore,  the massive moves over the past several days have created very volatile conditions and the reaction  to the report could be counterintuitive to normal market flows. If the NFP misses its mark  the EUR/USD could rise despite the likely jump in risk aversion as currency traders will focus on the compression in growth rate differentials rather than safe haven concerns. If however, the NFP are unabashedly positive the dollar should rally across the board, as it will benefit from both its  reserve currency status and superior economic performance of the US economy.  

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Comments (4)

alexjbrandt

February 05, 2010 at 06:33 AM ET

Lets see how the Canadian employment numbers look. I've noticed that over the last two months, that the Canadian Employment Change has been a leading indicator for the US NFP. Creating for some wild whipsaw price action in USD/CAD both times. Like last months CAD employment change was worse then expected so USD/CAD appreciated, then the US NFP came out which printed worse then expectations, resulting in the USD/CAD depreciating, then eventually it went back up. Couldn't make up its mind on which direction it wanted to go.

alexjbrandt

February 05, 2010 at 07:05 AM ET

Canadians added 43K jobs last month, pretty impressive. US NFP report could print positive or exceed market expectation then.

Demax

February 05, 2010 at 07:57 AM ET

Could be a surprise indeed Boris,

The BLS birth/ death model is a joke of the worst sort and is due for an annual "correction" as polite people might say.

As for the NFP itself - should we REALLY believe the BLS can accurately evaluate figures, or would we be better off asking the Ouija board?

alexjbrandt

February 05, 2010 at 08:04 AM ET

It would be better if they looked at government tax receipts as a indicator of jobless/job growth.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.