Ron Finberg's  Instablog

The Non Farm Payrolls often set the tone for the following week, with a worse than expected number triggering pressure on the US dollar. In recent months though, the figure has taken a back seat to the EU’s credit crisis and post news moves have been either erratic, with traders, especially in Forex not really knowing where the next move will be, or negligible. Nonetheless, even after Wednesday’s coordinated central bank moves and the markets nonstop watch of sovereign debt yields, the coming Non Farm Payrolls appears ready again to pack a wallop. This is due to Wednesday’s much better than expected ADP Employment figures that have raised outlook for the Non Farm Payrolls data.

Before delving further into possible Non Farm Payrolls trading ideas, a look at the previous employment numbers of the week.

• ·         ADP Employment Change: +206K vs 131K forecast – This marked three straight months of better than expected figures.  Also, both October and November numbers received positive revisions.
• ·         Initial Claims: 402K vs 390K forecast – After four straight weeks of sub-400,000 numbers, Claims were once again back above 400,000.
• ·         ISM Manufacturing (Employment Segment): 51.8 vs 53.5 last month.
• ·         Non Farm Payrolls: 120K consensus expectations vs 80K last month.  Last month’s figure of 80K was below 97K expectations. However, in the previous announcement, October figures were revised from 103K to 151K.

Looking at the numbers, the upward surprise in the ADP figures reflects the overall positive improvement in November’s Initial Claims data. The question is whether this will be seen in the Government’s official Non Farm Payrolls.  The answer could be yes. As, although there is often a lack of symmetry between the ADP and Non Farms, the combination of the Initial Claims data foreshadowing a strong ADP supports a stronger NFP.  Also, with the positive revisions that have taken place in the Non Farms, the government figures are catching up to the private sector surveys.

The next question is what to trade.  This is often confusing, as fundamentally, a strong number would be positive for the dollar. However, this often isn’t the case as the news can trigger an overall rally in riskier currencies that would lead the dollar lower.  As such, it makes sense to focus on other safe havens.  One possible example would be purchasing the USDJPY. The pair was well supported at 78.00 earlier in the week before falling lower on Wednesday’s central bank actions.  Nonetheless, it remains in an upward trend and could see 78.50 if it gathers any momentum from the Non Farm Payrolls release. 

One asset to avoid trading before the news is Gold.  In the past, prices of Gold have tended to fall on positive NFP results.  This is due to the premise that strong employment growth would limit the need of further FED stimulus, and thus would be non-inflationary. On the other hand, a worse than expected Non Farms payrolls would be expected to send Gold higher.  However, recently, prices have reacted to the overall risk sentiment of the market and have rallied during periods of risk buying, rather than acting as a true safe haven.  Therefore, it makes sense to first see which direction Gold is taking after the news, and then follow the momentum.

Well, its official, Germany’s sovereign debt has entered into the EU Debt crisis picture.  It is nowhere near the PIIGS stature, but its once glamorous position is waning.  Yesterday, yields on 10 year Bunds rose above those of 10 year UK Gilts (2.21% vs 2.19%). Forex traders reacted to the news by dumping Euros.  The action in German bonds overshadowed another PIIGS downgrade, as Portugal’s debt was cut to junk by Fitch.  Elsewhere, Japan’s economy and massive Debt/GDP levels were under greater scrutiny as credit agency S&P warned that a credit downgrade was possible.  With that backdrop, the dollar was higher across the board yesterday.  In early morning trading, Forex traders continue to chase the momentum, as the greenback continues to gain ground as it moves to new week highs against major currencies.

EURUSD  

In overnight trading, the EURUSD hit a new week low as it traded to 1.3299 and is trying to find support at the 1.3300 figure (see chart).  If it fails to hold the next log could take it down to 1.3225.  Euro buyers appear to be stepping back and waiting for prices to keep falling before jumping in and providing support.  Another hindrance to the pair could be the coming weekend, as Forex traders may not want to hold long positions and risk further headline risk when markets are closed. We continue to follow yesterday’s opinion to sell on any rally, with stops at 1.3405.

 Intraday Support/Resistance  1.3295/1.3405

GBPUSD

After a failing to hold above 1.5600 support, which was also around its 61.8 Fibo retracement level of its September lows to highs, GBPUSD continues to crack.  Similar to the EURUSD, buyers don’t seem too interested in bidding aggressively and would rather let the market come to them. Nonetheless, the Pound could see demand begin to pick up if sovereign debt buyers begin to rotate funds that were earmarked towards German and French debt flow to Gilts.  As such, we would still be sellers of rallies above 1.5570 with stops at 1.5610, but wouldn’t get too aggressive with shorting at current levels.  Alternatively, shorting the EURGBP at a current 86.05 may be a good idea as Forex traders may rotate funds from Euro denominated assets to Pounds.

(article originally posted onSwiftTick)

Intraday Support/Resistance  1.5475/1.5610

USDJPY

The aforementioned remarks above Japan have caused demand in the USDJPY to pick up.  Support is clearly forming at 77.00 with a possible move towards 78.00 if 77.55 resistance is broken.  While we aren’t always bid fans of trading the USDJPY due to its sudden moves, we are watching it closely lately.  We view it as a proxy for the dollar’s strength.  As such, we view the dollar’s strength more positively if it also gains against the Yen.  With that currently taking place now, it gives us more assurance in our dollar longs.  Looking ahead, we would be buyers of any move below 77.15 and possibly buying at 77.60 as a breakout move higher could occur.

Intraday Support/Resistance  76.90/77.55