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U.S. Dollar: Trading Non-Farm Payrolls

Last updated 7/1/2009 5:06 PM ET (GMT -5) 11 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: TRADING NON-FARM PAYROLLS
• EUR/USD: WHICH WAY COULD THE ECB LEAN?
• GBP/USD: SHRUGS OFF STRONGER DATA
• AUD/USD: CONSUMERS LOOK STRONG BUT HOUSING DOES NOT
• USD/CAD: OIL PRICES BELOW $70 A BARREL
• NZD/USD: GOLD PRICES UP $14
• USD/JPY: TANKAN NOT UP TO PAR

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: TRADING NON-FARM PAYROLLS

With two major event risks over the next 24 hours and the holiday weekend looming, it is not surprising to see mixed trading in the U.S. dollar.  The greenback sold off against the Euro but ended the U.S. trading session virtually unchanged against the British pound and Japan Yen.  Overall, investors are optimistic despite the prospect of rising unemployment.  At this stage of the downturn, the degree of job losses is relative since traders have already discounted the possibility of the unemployment rate hitting 10 percent. The VIX, which measures the volatility in the equity market has edged lower and reflects today’s improvement in risk appetite.  U.S. economic data improved from the previous month but fell short of the market’s lofty forecasts.  The dollar also came under pressure after Reuters reported that China has asked the G8 to discuss the issue of a new global reserve currency at their summit in Italy next week.  One day they are denouncing the dollar and the next day they are supporting it which tells us that reserve diversification is clearly not a dead issue.  However it will have to wait as the market shifts its focus to the June non-farm payrolls report tomorrow.

Non-Farm Payrolls Previe w

The big question for non-farm payrolls is whether last month’s sharp improvement can be sustained. The market currently expects payrolls to fall by 365k and for the unemployment rate to rise to 9.6 percent. In May, 345k jobs were cut compared which was sharp improvement from January when more than 700k Americans lost their jobs in a single month.  Therefore tomorrow’s non-farm payrolls report will be critical in confirming whether the hemorrhaging is over or if the improvement was only a one month fluke. Based upon our leading indicators for non-farm payrolls, we believe that job losses accelerated last month but only marginally. There has been a lot of good news including the Challenger layoff report which showed the first decline in layoffs since February 2008 and the rise in the employment component of manufacturing ISM. But it is natural to see a dip after last month’s sharp improvement especially since the closing of GM and Chrysler plants will add approximately 40k-50k people to the unemployment rolls. Like in the 1980s, the path back to positive job growth always comes with hiccups ( Charts comparing the current trend of NFP with 1980s recession ). Our forecast is for payrolls to fall between 375k and 450k.  

How to Trade Non-Farm Payroll s

Currency traders on the other hand only care about how the dollar could respond. Over the past 3 months, the U.S. dollar has weakened materially, but the weakness is actually a reflection of investor optimism. We believe that the level to watch is -500k. If non-farm payrolls fall by more than 500k, the dollar could sell-off initially but then quickly regain footing as risk aversion flows set in. If non-farm payrolls fall by less than 450k, the dollar could initially rally but then give back its gains as risk appetite improves. Anything in between could lead to erratic trading. Non-farm payrolls are a notoriously volatile piece of data to trade as revisions and expectations also impact the market’s reaction. Traders should also remember that the first reaction to the non-farm payrolls report is not usually the move that lasts for the rest of the trading day. Six out of the last six times non-farm payrolls were released, the knee jerk reaction was quickly erased (charts. The good thing is that there should be a lot of leeway for payrolls because a dip is natural after such a large rebound. In fact, the currency market’s reaction to the ADP number this morning could be symbolic of how the dollar could trade after the payrolls report. When the payroll provider reported that -473k people fell off of corporate payrolls, the dollar soared on risk aversion flows but it quickly reversed after traders realized that as long as job losses are less than 500k, it still represents a material improvement from January 2009 levels. If job losses exceed 500k however, it could resurrect the risk of a double dip recession.

In terms of data that was released today, the most important report was manufacturing ISM which increased from 42.8 to 44.8, slightly less than the market’s forecast.  Employment increased which is promising but new orders and inventories fell.  The headline number is important because it is a barometer for the economy but what most economists focus on is the spread between new orders and inventories.  Last month, the spread widened from 18.2 to 18.4 which suggest that new orders fell at a slower pace than inventories and therefore production could pickup in the coming month. Meanwhile Challenger Grey and Christmas reported the first decline in layoffs since February 2008.  Private sector payroll provider ADP reported that that the number of people on corporate payrolls fell by 473k.  Construction spending also dropped 0.9 percent while pending home sales rose a tepid 0.1 percent.  

EUR/USD: WHICH WAY COULD THE ECB LEAN?

The euro has appreciated significantly ahead of the European Central Bank’s monetary policy decision.  The strength of the currency suggests that traders do not expect any groundbreaking announcements.  Interest rates will be left unchanged at 1 percent and Trichet will most likely keep the size and scope of the asset purchase program intact.  Yet that does not mean that the EUR/USD will avoid volatility in the post meeting press conference.  Not only will currency traders be reeling off of the U.S. non-farm payrolls report, but as usual they will hang onto every word that Trichet says.  From an economic perspective, the Eurozone economy remains weak but certain sectors have been improving. Businesses and consumers have grown more confident which is the first step towards a recovery. German retail sales also increased for the third straight month in May and manufacturing sector PMI was revised higher. Yet there is still plenty of weakness as the unemployment rate continues to rise and activity continues to contract, albeit at a slower pace. The key is what ECB President Trichet say about the results of the first ever 12 month refinancing operation that pumped a record amount of money into the financial system. If he is satisfied with the results, then he may simply coast on its success and leave everything unchanged. The ECB should still lean towards looser rather than tighter monetary policy since they only initiated their quasi Quantitative / Credit easing program last month.  In addition to the rate decision, the Eurozone unemployment rate and producer prices are due for release.  

GBP/USD: SHRUGS OFF STRONGER DATA

Despite stronger than expected economic data, the British pound failed to rally as the currency continued to feel the effect of yesterday’s sharp downward revision to first quarter GDP.  Manufacturing sector PMI rose to the strongest level since May 2008.  At 47.0, the index remains in contractionary territory but is getting closer to expansionary levels.  The index of services also rebounded from -1.6 to -1.2 percent.  The employment component of the report improved which should bode well for the labor market report.  Manufacturing production also expanded for the first time since March 2008 according to Markit, who publishes the report.  Construction and service sector PMI are due for release on Thursday and Friday respectively.  If similar improvements are seen, then pound traders may forget about the weak GDP number.   Service sector PMI rose back into expansionary territory last month and a further improvement on Friday should be very positive for the British pound.   

AUD/USD: CONSUMERS LOOK STRONG BUT HOUSING DOES NOT

Price action in the commodity currencies was mixed with the Australian and Canadian dollars rising but the New Zealand dollar slipping.  The Canadian dollar was actually the best performer of the bunch, despite the fact that Canadian markets were closed due to Canada Day. Australia was the only country to release any noteworthy reports today. The good news was that Australian Retail Sales doubled the market’s forecast, coming in at a respectable 1.0%. A strong consumer only adds to worldwide impressions that the economy is one of the best positioned for a recovery. In addition, since Australia will start implementing a new wave of income tax cuts, it is expected that Retail Sales will continue to improve. However, extremely weak Building Approvals prevented the Aussie from staging a meaningful rally.  Approvals fell -12.5% last month from 5.1% the previous month.  Australia has been pretty successful in maintaining their housing market despite economic turmoil, but it is clear that there is underlying weakness. The manufacturing PMI report released last night also showed that manufacturing activity continues to improve. As far as event risks for tomorrow, we are looking at Australian Trade Balance and New Zealand’s ANZ Commodity Prices.

USD/JPY: TANKAN NOT UP TO PAR

USD/JPY is gaining some ground despite losing half of its earlier gains. Economic data painted a slightly bleaker picture of Japan’s prospects, indicating that a recovery is approaching but will be slower than otherwise expected. The quarterly Tankan report was released last night for Manufacturing and Non-Manufacturing industries. Both releases improved on a monthly basis, but failed to satisfy expectations. The underlying report also showed that weakness will continue to dominate economic prospects. It was indicated, that perhaps the most concerning factor is that businesses plan to continue drastic spending and investment cuts. It can only be assumed that the result will be higher unemployment, making an already desperate employment market even worse. Furthermore, the large companies that were surveyed indicated that they expect corporate profits to tumble by approximately 20% this year. It was also reported that Chinese Manufacturing PMI continued to expand, reaching 53.2. The prospects of a strengthening Chinese economy should be positive for Japan but we have yet to see meaningful effects in Japanese manufacturing and trade. No new Japanese data is expected for the rest of the week, but the importance of the Tankan index will take a while for traders to digest.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play over the next 24 hours. The calendar is literally packed with highly critical European and US events. Firstly, the ECB is set to announce their interest rate decision at 7:45 am ET or 11:45 GMT followed by the EZ Unemployment Rate and PPI at 5:00 am ET or 9:00 GMT. ECB President Trichet will begin his post meeting press conference at 8:30am ET or 12:30 GMT. At the same time, the U.S. will release their June Non-Farm Payroll report. The EUR/USD has levied itself back into the Bollinger band buy zone and is making its approach towards the June 3rd high of 1.4338. As the swing high of the past 7 months, it should serve as a stiff level of resistance.  The strongest level of support should be at 1.3738 level, which is the June lows and the March 19th high.

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Comments (11)

Sultan

July 01, 2009 at 09:20 PM ET

Dear Ms Lien,
With the BRIC increasingly nervous about the USD as a safe-haven currency, will any rise in the USD after the release of the non-farm payrolls data be still attributable to risk-aversion and of course, any fall in the USD be attributable to risk-tolerance? Thank you.

klien

July 02, 2009 at 09:08 AM ET

Next week on July 9th I believe the G8 Summit Begins, so reserve diversification could become a hot topic once again

klien

July 02, 2009 at 11:05 AM ET

As we have warned, you need to consolidate your ideas into one one post and we do not allow people to promote themselves on our site (you had listed your email address etc)

Sultan

July 03, 2009 at 06:53 AM ET

I think that your admonition must have been directed to someone else. I didn't list my email address, promote myself etc. I simply asked the question above.

klien

July 03, 2009 at 11:14 AM ET

It was, we have since deleted that person's comment

forexian

July 02, 2009 at 04:15 AM ET

I see no more reason for Euro to sustain...........its about to crash..............

Eddie09

July 02, 2009 at 08:19 AM ET

The big market makers including the interbanks, already know the
Non-farm number well in advance, don’t you think?

klien

July 02, 2009 at 09:09 AM ET

Not at all. There is a whisper number but if they "knew it" we wouldnt see the volatility that we do in the markets post payrolls. Also, the U.S. government works hard to make sure these numbers are not leaked.

Eddie09

July 02, 2009 at 09:19 AM ET

Whisper between friends is good enough, I think.

Dario Fuentes

July 02, 2009 at 11:25 AM ET

Hi Kathy,
Could you please explain to me the concepts of risk-aversion and risk apetite and whatt is their influence in the current curency market conditions?
Thanks in advance

klien

July 02, 2009 at 11:28 AM ET

When risk appetite is dominating the markets, it means that investors are optimistic, equities are rallying and currency traders are moving out of the low yielding U.S. dollar into higher yielding currencies like the euro, british pound, australian and new zealand dollars. When risk aversion dominates, it means that investors are pessimistic or nervous and therefore they are selling stocks as well as higher yielding currencies and parking their money back into the safety of U.S. dollars. This is a trend that has been influencing how the dollar trades for the past year or more.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.