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Non Farm Payrolls Preview

|Includes: GLD, PowerShares DB USD Bear ETF (UDN)

Originally posted on SwiftTick
The fun continues on Friday with the release of the Non Farm Payrolls Employment report.  In recent years the figure has led to the biggest moves in with Forex currency pairs, even outdoing FOMC Meetings.  The best part about the Non Farm Payrolls, is that it occurs after a week’s worth of prior employment numbers, therefore, there is always this nice buildup before we get to the actual data.

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.