Forex Trading Strategy For Nonfarm Payroll Employment Change (NFP) 07/02/10

by Henry Liu on July 1, 2010

8:30am (NY Time) US NFP      Forecast -110K       Previous 431K
Unemployment Rate                   Forecast 9.8%        Previous 9.7%
ACTION: USD/JPY                        BUY -30K                 SELL -180K

We’ll be focusing on the NFP release today, which is expected at -110K as median forecast figure taken from different surveys, and the previous release figure was at +431K. If you remember what took place during last NFP release, market reacted with risk aversion sentiment as the actual figure missed expectation by 90K, causing stronger demand for safe-haven currencies such as the USD and JPY across the board.

With today’s release, as per a special report by Reuters, the expectation ranges from -200K to +30K, counting on an increase in the private sector payrolls estimated at +112K versus the 41K release in May. This obviously contradicts ADP’s report released earlier this week, which came out at a disappointing 13K versus an estimate of 60K.

Of course, the Unemployment Rate will be another important figure today as it is expected to rise to 9.8% from 9.7% in May. I believe that in the event we get a conflict of releases, such as a better NFP figure but worse Unemployment Rate, market will react more to the Unemployment rate, especially if it’s above the psychological 10.0% level.

Since this NFP release will be the first release in 2010 with a negative figure, it makes sense to see a strong “pricing in” by traders and speculators alike ahead of schedule. as what we’ve seen in the strengthening of JPY across the board for the better part of the week, and this movement has been predicted by my Weekly Outlook report on Sunday, which I’ve posted in an excerp here.

Considering the recovery and some consolidation that we saw during Thursday’s trading session, JPY could fall under the old “Buy on Rumor, Sell on News” effect should we get an as expected release, or -110K; therefore, I’d lean towards selling JPY (BUY EUR/JPY, AUD/JPY, GBP/JPY, etc…) if both NFP and Unemployment Rate come out close to expectation…

However, if we get a significantly lower release on the NFP (-180K) and Unemployment Rate, I’d be looking to BUY JPY immediately. There might be a change to even go LONG on GBP/USD or EUR/USD as another disappointing NFP release could mean a trend is developing as traders may SELL USD on the perception of a possible slowdown in U.S. economic recovery or double dip recession. But this movement may be delayed as the initial market movement will be focused on strong JPY, which will in turn drive all other major crosses lower.

On the other hand, if we get a positive NFP release (+10K) and the Unemployment Rate remains at 9.7% or even came out in line with expectation, JPY should weaken immediately as USD/JPY may recover and move above 90 and head on to 94 in the next few days… This could potentially turn into a long-term trade as other JPY crosses may provide much better profit level (AUD/JPY for example).

If we get a conflict release, we will wait and see how the market reacts first. If there is an overwhelming sentiment driving the market, there will be plenty of opportunities for entry…

Below is a general guideline on how to trade NFP release. This is what I do with EVERY NFP release.

Let’s talk about how to trade this release: We’ll wait for the numbers to come out, but will not take any trade YET, even if we get our tradable figures (-180K or -30K). We’ll wait for a possible revision to the previous release number, which is 290K, as the market usually overreacts with the Revision and chances favor for this trade to work out if we do not get conflicting releases between the revision and the actual release; at this point, still stay out of the market.

Then the next step is to wait for the Unemployment Rate, which is expected to be at 9.8% from 9.7% prior. If the Unemployment Rate were to surprise higher, we’ll have to really make an executive decision at the time of the release and see what is the primary focus of the market. As long as we don’t go over the 10.0% psychological level, I think traders may not focus exclusively on this release. However, if we do get over the 10.0% level, I’d probably be looking for a SELL on USD/JPY or other JPY crosses and Yen should strengthen.

After all of the numbers have been released. Wait for the market to push… then be patient and wait for a decent retracement before getting in. Look for recent support/resistance areas for entry as a high impact news with various components will usually be extremely volatile, and those who are patient will always get a chance to enter at much better entry.

DEFINITION

“Measures the change in number of employed people during the previous month, excluding the farming industry. A rising trend has a positive effect on the nation’s currency. Job creation is an important indicator of economic health because consumer spending, which is highly correlated with labor conditions, makes up a large portion of GDP. This report is the first of the month that relates to labor conditions, making it susceptible to big surprises.”

{ 7 comments… read them below or add one }

ahmed July 3, 2010 at 7:10 am

hello Henry, your forecast was very correct. i am sad i missed the pips cos i was scared & missed d opportunity. heard u are on two weeks leave. maybe u can leave us with a good summary of what t o expect this week. u are doing a great job. happy holiday.

Reply

willie July 2, 2010 at 11:48 pm