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U.S. Non-Farm payrolls are expected to drop 520K in May, while the annual rate of unemployment is projected to reach a 26-year high of 9.2% for the same period, and fears of a protracted downturn could weigh on the exchange rate as the nation faces its worst recession in over half a century.

Trading the News: US Change in Non-Farm Payrolls

What's Expected
Time of release: 06/05/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -520K
Previous: -539K

Impact the US NFP report had on EURUSD through the last 2 months


Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Apr 2009

05/08/2008 12:30 GMT

-600K

-539K

+13

+155

Mar 2009

04/03/2008 12:30 GMT

-660K

-663K

-37

+39

April 2009 US Change In Non-Farm Payrolls

U.S. Non-Farm Payrolls fell 539K in April amid expectations for a 600K drop in employment, while the jobless rate surged to 8.9% from 8.5% in March, which is the highest level since 1983. The data breakdown of the report showed public-sector jobs increased 72K during the month, with the participation rate rising to 65.8% from 65.5%, while private payrolls slumped 611K from the previous month. The data suggests economic conditions are beginning to stabilize as the government takes unprecedented steps to stimulate the ailing economy however, growth prospects are likely to remain subdued throughout the first half of the year as households face a weakening labor market paired with fears of a protracted downturn. At the same time, the collapse of the auto industry is likely to weigh on the economy going forward, and the jobless rate is likely to push higher as GM and Chrysler head into bankruptcy.

March 2009 US Change In Non-Farm Payrolls

The U.S. shed another 663K jobs in March, while the annual rate of unemployment surged to 8.5% from 8.1% in February, which is the highest level since November 1983, and the labor market is likely to deteriorate further as business continue to cut back on production and employment in an attempt to weather the economic downturn. The world's largest economy has lost nearly 5.1M jobs since the recession began in late 2007, and conditions are likely to get worse as firms face fading demands from home and abroad. As a result, Fed Chairman Ben Bernanke said that the jobless rate could perhaps exceed 10% ‘for a period' as the downturn in the global economy intensifies, and policymakers may take additional measures to get the nation back on track as private-sector spending, which is one of the biggest drivers of growth, deteriorates.


What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market's directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

U.S. Non-Farm payrolls are expected to drop 520K in May, while the annual rate of unemployment is projected to reach a 26-year high of 9.2% for the same period, and fears of a protracted downturn could weigh on the exchange rate as the nation faces its worst recession in over half a century. At the same time, as Fed Chairman Ben Bernanke suggests ‘that the pace of economic contraction may be slowing,' expectations for an economic recovery later this year could drag on the greenback over the near-term as market participants raise their appetite for higher risk/reward investments. The preliminary 1Q GDP report showed economic activity in the world's largest economy fell the most in five-decades during the last two quarters as businesses reduced stockpiles of unsold goods at the fastest pace since recordkeeping began in 1947, while demands for U.S. exports plunged 28.7%% from the previous quarter to mark the biggest decline in 38 years. In addition, the ADP employment report showed private payrolls slumped 532K in May, which already exceeds forecasts for a 520K drop in NFP's, and the data encourages a weakening outlook for growth and inflation as businesses continue to scale back on production and employment in an effort to weather the downturn in global trade. Moreover, a separate report showed industrial outputs fell for the sixth consecutive month in April, with the capacity utilization rate slipping to a record-low of 69.1% during the same period, and conditions may get worse as firms continue to face fading demands from home and abroad. Meanwhile, the FOMC lowered its growth forecasts in April and projects a slower recovery in 2010, with the meeting minutes showing some members of the governing board raising arguments to increase the scope of the Fed's asset purchase program in order to ‘spur a more rapid pace of recovery.' As the central bank anticipates growth prospects to remain subdued throughout the year and forecast unemployment to reach an upper limit of 10.0%, the government may continue to take additional steps to stimulate the ailing economy, and investors may hold a bearish forecast for the greenback as they weigh the outlook for future policy.

Expectations for 520K drop in employment favors a bearish outlook for the dollar however, the rise in public-sector employment could help to stem the downturn in private payrolls as President Obama pledges to create or save nearly 4M jobs during his term in office. Therefore, if non-farm payrolls fall 500K or less in May, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

In contrast, fears of deepening downturn paired with fading demands from home and abroad could lead businesses to take additional steps to reduce their cost structure, and price action following a dismal employment report could set the stage for a short dollar trade. As a result, an in-line print, or a fall of more than 520K in private payrolls would lead us to hold a bearish outlook for the greenback, and we will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.