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The U.S. labor market is expected to resume its improving trend as early forecasts are that the economy lost 328,000 jobs in July, down from 467,000 the month prior.

Trading the News: US Change in Non-Farm Payrolls

What's Expected
Time of release: 08/07/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -328K
Previous: -467K

Impact the US NFP Report has 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)

June 2009

07/02/2008 12:30 GMT

-365K

-467K

0

-39

May 2009

06/05/2008 12:30 GMT

-520K

-345K

-216

-280


May 2009 Change in Non-Farm Payrolls

The U.S. economy shed another 345K job May amid expectations for a 520K drop in non-farm payrolls, while the annual rate of unemployment surged to a 25-year high of 9.4% as discouraged workers returned to the labor force. The data encouraged an improved outlook for the world's largest economy, with market participants raising bets for an economic recovery later this year, and long-term expectations for higher interest rates could lead the dollar higher over the near-term. At the same time, Fed Chairman Bernanke held a dour outlook for the economy as he expects unemployment to rise well ‘into the next year,' and sees a risk for a ‘sizeable' increase in job losses as businesses continue to scale back on production and employment in an effort to reduce costs. As a result, the outlook for private spending remains bleak, and households may turn increasingly pessimistic towards the economy as the labor market deteriorates.

8-6-09TTN-02


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.

7-07-09TTN-03

7-07-09TTN-04

How to Trade This Event Risk

The U.S. labor market is expected to resume its improving trend as early forecasts are that the economy lost 328,000 jobs in July, down from 467,000 the month prior. Early indicators sent mixed signals as the ADP employment report showed an improvement to -371,000 from -463,000 but missed estimates of -350,000. The Challenger jobs cut survey reported a 5.7% decline in layoffs from a year ago and initial jobless claims improved to 550,000 versus expectations of 580,000. We have also seen job losses in the manufacturing sector decline for the last five months and the improvement in the employment component of the ISM report to 45.6 from 40.7 is a sign the trend should continue. However, the service sector saw job losses accelerate in June to 244,000 from 107,000 and the ISM report foreshadowed further declines with its employment component falling to 41.5 from 43.4. Considering that the service sector accounts for a greater portion of jobs in the country, further weakness in the sector could lead to a disappointing NFP print. Additionally, the unemployment rate rising to 9.6% as expected could raise concerns over domestic growth.

Nevertheless, a deceleration in the pace of job losses should spark risk appetite which could translate into bearish price action Therefore, if payrolls fall by 300K or less, we will look for a green, five-minute candle following the release to confirm a buy entry on two lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance, and this risk will establish our first target. Our second objective 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 order to lock-in our profits.

Conversely, weaker than expected employment figures will fuel current concerns over its impact on future consumer consumption. Therefore, more than anticipated job losses or a higher than expected unemployment rate would lead us to a bullish dollar outlook ,and we will follow the same strategy for a short euro-dollar trade as the long position revealed above, just in reverse.

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