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Bernanke Comments, Non-Farm Payrolls Preview

Last updated 2/2/2012 10:42 AM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

Non-Farm Payrolls will be released on Friday and all signs point to slower job growth.  According to this morning’s jobless claims report, the number of people filing for unemployment benefits declined last week but if we average the last 4 weeks of claims and compare it to December, there has not been any major improvements in the labor market.  The momentum that we saw in the labor market in December will be difficult to be sustained and unfortunately the U.S. dollar may not be able to handle more bad news. Since the beginning of the year, the greenback has weakened significantly. Although the rally in equities suggests that the greenback’s weakness may have to do with an improvement in risk appetite, the real reason why investors have been selling dollars is because the Federal Reserve extended their low rates pledge to 2014 and is openly considering increasing monetary stimulus. This morning, Fed Chairman Ben Bernanke said that even though the jobs situation improved modestly in the past year, we have long way to go before the job market is normal.  The Federal Reserve believes that the unemployment rate will continue to decline this year according to their latest economic projections but it will not be enough to remove the need for more stimulus. Bernanke feels that the recovery has been frustratingly slow and vulnerable to shocks as U.S. consumers face significant headwinds.   In an environment such as this, a weaker non-farm payrolls report could do quite a bit of damage to the U.S. dollar. In the past, the U.S. dollar traded on one thing and one thing alone – safe haven flows. The demand for safety was so significant that at times investors completely ignored the non-farm payrolls report – which is traditionally one of the most market moving pieces of U.S. data. Risk appetite dominated trading and even when NFPs beat expectations in December, printing 45k more than projections, the gains in the dollar were short-lived as risk appetite improved and safe haven flows eased out of the greenback. This month however, the dollar may have a much harder time finding buyers, especially if job growth is so weak that it amplifies the possibility of QE3. 

The question then becomes how weak could non-farm payrolls be? Every month we look at a number of leading indicators for non-farm payrolls and most of the reports this month point to weak but not terrible job growth.  To start, the unwinding of seasonal hires in January will contribute negatively to payrolls – 40k temporary couriers were hired for holidays.  Private payroll provider ADP reported an increase of 170k jobs last month versus 292k in December. Although ADP does not have the best track record of forecasting the absolute amount of private sector payrolls, it has been fairly reliable as a directional indicator and this month points to softer job growth. At the same time, the four week moving average of jobless claims ticked up slightly in January which is in line with a weaker but not terrible NFP report. Challenger Grey & Christmas reported a 38 percent rise in layoffs. Consumer confidence indicators were mixed with the Conference Board reporting deterioration in sentiment and the University of Michigan reporting an improvement. The only good news was continuing claims which fell to their lowest level since September 2008. 

Jobs have long been the missing ingredient in the U.S. recovery and slowly but surely the labor market is improving. Unfortunately the jobless rate is not falling fast enough to mitigate the downside risks in the global economy. With Europe’s sovereign debt troubles still holding the world hostage, better than expected economic data from the U.S. will have a diminishing impact on the U.S. dollar until the Federal Reserve starts to feel comfortable enough to raise interest rates. Weak data on the other hand will support the case for more easing, giving investors a stronger reason to sell dollars. The magic number tomorrow is 100k – if NFPs rise less than 100k, USD/JPY could sink quickly towards 75. If it rises more than 100k, we should see some near term support for the greenback.

Leading Indicators for NFPs Point to Weaker Job Growth

Here are the arguments for strong vs. weak NFPs. 

Arguments for Better Non-Farm Payrolls:

1.      University of Michigan Consumer Sentiment Index at Highest in 11 Months

2.      Continuing Claims Fewest Since Sept 2008

Arguments for Weaker Non-Farm Payrolls:

1.      ADP Reports Increase of 170k Private Sector Jobs vs. 292k in Dec

2.      4 Week Moving Average of Claims at 376k, vs. 374k in Dec

3.      Employment Component of Manufacturing ISM Declines

4.      Conference Board Reports Decline in Consumer Confidence

5.      Challenger Reports 38.9% Increase in Layoffs

How to Trade Non-Farm Payrolls

The Non-farm payrolls report is a notoriously volatile piece of data to trade as revisions and expectations also impact the market’s reaction. The best currency pair to trade NFPs is generally USD/JPY because of its more logical reaction to U.S. data. The price action of other currency pairs is often diluted by their correlation to risk appetite. In the past, the EUR/USD& #8217;s knee jerk reaction rarely lasts.  Even though the direction associated with each month’s move has not always been the same, the immediate reaction is typically reversed once U.S. stocks open for trading. This month things may be different because of the Fed’s unambiguous stance on monetary policy, but it always pays to wait for the volatility to settle and for the trend to become more obvious before trading the EUR/USD.

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Comments (2)

moonie

February 02, 2012 at 11:55 AM ET

Love your column! That's "knee-jerk reaction" by the way. As in , a doctor testing your reflexes by striking your knee with a rubber mallet.

klien

February 02, 2012 at 11:57 AM ET

Thanks! I think that was my spell check being too clever.

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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.