A Non-Farm Payroll Trading Opportunity

Includes: FXC, UDN, UUP
by: Ralph Shell

The NFP report comes out the first week of every month and is usually good for more than a little volatility. Taking a position in advance of the report's release, however, can be a real crap shoot. The actual NFP numbers can show a big variation from the number that had been forecast for no apparent reason. For example, on August 3, 2012, 100K had been the forecast, but the number came in at 163K. A month later, the report of September 7, 2012 was only 96k, far less than the 130K guess. Later the September 2012 report was revised upward to 142K rather than the 96K previously reported.

The number seems practically impossible to predict, and then a month later, the number is revised. It is difficult, indeed, to understand why such an unpredictable number is of such importance. The market's prediction for tomorrow is 125K, far less than mine at 200K. The unemployment rate is estimated to be 7.9%.

So taking a position in anticipation of a specific number that will have a predictable market reaction is conjecture. First, you must guess the number, and then correctly anticipate how the market will respond to the number. You might have better odds drawing an inside straight.

A better opportunity might be trying to find an attractive entry point to buy the USD and sell the Canadian dollar. Earlier this week, it was reported the Canadian GDP on a M/M basis slipped to -0.1%, less than the positive 0.2% expected. This is the first decline in six months, and according to The Globe and Mail's Michael Babad:

Canada's key resource sector shifts 'from growth leader to laggard'

"The mantra for the Canadian economy in recent years has been how it's performed relatively well largely thanks to the resource sector," said Mr. Porter. (from the Bank of Montreal)

"Both parts of that mantra got blown out of the water with the August GDP report."

The broader economy, he noted, has now gained just 1.2 per cent over the course of a year, or about half of the annual pace the United States chalked up in the third quarter.

The resource sector, in particular, which takes in mining and oil and natural gas, has slipped by 3.7 per cent year over year.

In an earlier article, we had noted that the Western Canadian provinces are having budget problems. It looks like the US shale revolution might be the cause of these problems, and they are not going away. Cheaper natural gas in the U.S. has slowed the demand for oil and natural gas acreage in Canada, and the royalty income needed to run the Western provinces.

The problems in the Canadian energy markets continue. In Calgary, the energy investment bank Peters & Co. estimates there are oil sands assets worth $17B for sale. The sellers appear to be mostly U.S. companies who may be finding better drilling opportunities in the tight oil formations of the U.S.

The recent weakness in WTI crude may be another reason the sands developers may be curtailing their activities. This is costly oil to produce and ship to the refiners. If the WTI slips under 80, there would be a further reduction of activity in Alberta.

Canada had best develop both the Keystone pipeline and one for the Asian markets through British Columbia. Additionally, LNG plants on both the Atlantic and the Pacific should be part of their future.

The high was made in the loonie in September, when the QE3-inspired "buy commodities and commodity-related currency" mantra was in vogue. Gradually, some of the specs have been getting out, but there are still many longs. We have been flirting with the 200 day SMA. A decisive move above it would probably take the pair (USDCAD, FXC) to above 1.02. Use weakness under .9940 to accumulate longs.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.