Wednesday July 2, 2008 - 21:44:06 GMT
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Forex Research - How to Trade Non-Farm Payrolls
â€˘ Will the ECB Raise Interest Rates Beyond July?
â€˘ British Pound Falls Victim to Weak Economic Data
How to Trade Non-Farm Payrolls
The US dollar has weakened ahead of the June non-farm payrolls report. According to payroll provider ADP and Challenger Gray and Christmas, the US labor market deteriorated significantly last month. ADP reported a 79k drop in payrolls while Challenger reported a more than 46 percent increase in layoffs. There
is absolutely no reason to believe that the labor market has improved
since the only argument for stronger payrolls is strike activity, which
has fallen by 8300 people. Continuing claims are
at the highest level since February 2004 and with Starbucks announcing
that they are closing 600 stores, which translate into as much as
12,000 new layoffs, these levels are expected to rise. Non-farm
payrolls is always a big market mover, but this time around, we expect
unusual volatility since ECB President Trichet will begin his post
monetary policy meeting press conference minutes after the NFP release. Here is the link to our non-farm payrolls preview and why we think payrolls could drop by more than 100k. NFP
is always dangerous to trade given the possibility of big intraday
swings, but USD/JPY should be the currency pair that has the purest
reaction to the NFP report because it will not be diluted by the
comments from the ECB. It has actually been consolidating for the past
3 trading days and is itching for a breakout. The EUR/USD on the other
hand could have a knee jerk reaction to the NFP report and then a sharp
reversal as traders tune into Trichetâ€™s comments. Donâ€™t be surprised by
100 pip candles in both directions. The press conference begins at
8:30am ET, but by the time Trichet starts talking, it is usually 8:40
to 8:45am. The market expects a bad number, so a negative non-farm
payrolls report will not be enough of a surprise. The current forecast
calls for 60k jobs to be shaved off US payrolls. If payrolls come any
where near -90k, the dollar would collapse against the Euro as the
market questions the viability of a 2008 rate hike by the Federal
Reserve. If payrolls on the other hand are better than -40k, it
suggests that the labor market is bad but not as bad as everyone may
have feared, which could be dollar positive. Also
keep an eye on the ECB interest rate decision and the press
conference. If Trichet remains hawkish and hints that they have to
raise interest rates by more than 25bp this year, then the dollar could
fall against the Euro even if NFPs drop by less than expected. If
Trichet is noncommittal about future rate hikes on the other hand, the
Euro could suffer.
Will the ECB Raise Interest Rates Beyond July?
The ECB is expected
to raise interest rates for the first time since 2007 but the quarter
point rate hike will not be the big market mover. Instead, the recent price action of the Euro indicates that traders expect hawkish comments from ECB President Trichet. With the
annualized pace of Eurozone producer prices growing by the fastest pace
on record, consumer spending in Germany doubling expectations and the
German unemployment rate falling to a 14 year low, the ECB has to
seriously reconsider their original plans to raise interest rates only
once this year. The ECB is a central bank that
hates surprises and because of that, they always like to prepare the
markets weeks if not months in advance of any pending move. That
is why they have been telling us that a 25bp rate hike is the
appropriate expectation for the upcoming monetary policy meeting. They have also been warning that they are not planning a series of rate hikes. However the ECB may have to backtrack on these words given the recent economic reports. There are 3 possible scenarios for the upcoming interest rate decision that have been outlined in our ECB Preview. The ECB will most likely raise rates by 25bp and leave the door open for further
rate hikes, but we wouldnâ€™t rule out a 50bp rate hike or what the ECB
has hinted all along, which is one rate hike and thatâ€™s it for the
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Falls Victim to Weak Economic Data
The British pound has
been plagued with bad news this week. Not only did consumer confidence
plunge and activity in the manufacturing sector contract even further, but construction sector PMI fell from 43.9 to 38.8, the lowest level since the survey began in April 1997. The housing market has long been the Achilles heel of the UK economy and this latest number tells us that there is no respite in sight. Service sector PMI is due for release tomorrow and if that deteriorates further, the UK economy as a whole may be at risk of falling into a recession.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Australian Dollar Surges on Strong Retail Sales Report
The Australian, New Zealand
and Canadian dollars strengthened against the greenback thanks to
better than expected economic data and higher commodity prices. Crude oil prices closed at a new record high above $143 a barrel while gold prices are closing in on its 3 month high. Despite the dovish comments from the Reserve Bank of Australia yesterday, retail sales were much stronger than expected. Consumer spending rose 0.7 percent, the strongest pace of growth since November 2007. This is largely due to higher food and gasoline prices since sales at department stores were actually down 0.8 percent. Australian service sector PMI and their trade balance are due for release this evening. Given the drop in manufacturing PMI, service sector growth is likely to be nonexistent.
Tell us what you think on the Canadian dollar Forum.
USDJPY: Prime for a Breakout
The US dollar has been consolidating against the Japanese Yen for the past 3 trading days and judging from the price action of the currency pair, it is prime for a breakout. The
non-farm payrolls report provides the perfect catalyst for a break so
expect some interesting price action in the currency pair over the next
24 hours. Despite the 166 point drop in the Dow,
the Yen crosses have been mixed with most of the pairs rising except
for USD/JPY and GBP/JPY which have been hit by weaker US and UK economic data.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
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