Thursday September 2, 2010 - 16:14:54 GMT
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Forex Blog - What type of market reaction should we expect from the US employment report on Friday?
I wrote this last night on GVI Forex and it is worth reposting here as we look ahead to the key US employment report tomorrow. At month end on Wednesday it looked like traders would head for the risk aversion bunkers ahead of the US jobs report but those trading that way were squeezed hard by yesterdayâ€™s sharp stock market rally
From GVI Forex:
This got me thinking about these markets, which seem to factor in the worse case risk and then run for cover when there is news or data that does not fit the mold. During the financial crisis, markets factored in a risk of Armageddon for the financial system. During the European sovereign crisis, markets factored in a risk for European country defaults and a risk that the euro could self destruct. Currently, markets that seem to have factored in the risk of a double dip in the US ignored the weaker ADP report and ran for cover Wednesday on the better ISM PMI.
This has been followed by a cautious Thursday session as the market digs in ahead of Fridayâ€™s key report. Complicating the outlook is the end of summer and thin trading ahead of the long US Labor Day weekend. This makes it an especially tough call.
So what type of market reaction should we expect from the US employment report on Friday? This is a tough call as it depends on how far the miss from consensus forecasts.
Normally I would be more inclined to suggest fading a reaction on better-than-expected data as the employment situation is pretty bleak. However, after Wednesday sharp stock market gains following the better-than-expected ISM PMI, any consensus or above consensus result would likely see a relief reaction that the sky is not falling. On the other side, a worse-than-expected result would likely see a knee jerk risk aversion reaction but perhaps with less follow through as it would be less of a surprise. It all depends on the extent of the miss vs. consensus forecasts.
If this sounds like I am suggesting toss a coin and hope it lands on heads or tails you may be right. It may a better strategy to wait out the initial reaction and then decide whether it pays to trade in what will be an increasingly less liquid market once Fridayâ€™s data releases are out of the way.
I have not even mentioned the JPY and likely caution ahead of the long weekend with intervention chatter looming over this pair.
Jay Meisler is a co-founder of Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas Global-View.com
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