US NFP (Nonfarm Payroll) Employment Analysis & Trade Plan 09/13/10 - by Henry Liu

We’ll be trading the US NFP (Nonfarm Payroll) Employment Changes, it is the most volatile news release for the week as traders and their cousins all sit around in front of their PCs preparing to jump in…

Here’s the forecast:
8:30am (NY Time) US NFP Forecast -100K Previous -131K
8:30am (NY Time) US Unemployment Rate Forecast 9.6% Previous 9.5%
ACTION: USD/JPY BUY -30K SELL -170K

The Trade Plan
With today’s release, as per a special report by Bloomberg, the expectation ranges from +70K to -190K, counting on an increase in the private sector payrolls estimated at +47K versus the 71K release in July, and Census job cuts in the public sector of -119K. Market has shifted down its sentiment towards private sector jobs slightly after Wednesday’s ADP report of -10K versus +20K of expectation.

The Unemployment Rate will be another important figure today as it is expected to rise to 9.6% from 9.5% in July. 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 if it’s above the psychological 10.0% level.

Considering the lackluster market movement during Thursday’s trading session after ECB Trichet’s interest rate speech, market is likely to remain neutral at the time of NFP release… We could see potential movement in either direction pending on the outcome of the release.

Here’s the plan: If we get a significantly lower release on the NFP (-170K or worse) and Unemployment Rate (9.6% or worse), I’d be looking to BUY JPY (SELL USDJPY, SELL AUDJPY) on a retracement. There might be a chance to go LONG on GBP/USD or EUR/USD as “delayed trades” because the immediate reaction to another disappointing NFP release would prompt traders to SELL USD against JPY. But after the initial spike focused on strong JPY is over, traders will turn towards LONG on EUR and GBP while selling USD.

On the other hand, if we get a positive NFP release (-30K or better) and the Unemployment Rate remains at 9.6% or better, JPY should weaken immediately as USD/JPY may recover and move above 87 throughout the trading session, and the long-term trend would eventually head back on to 90 in the next few weeks…

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. If you just wait for 5 minutes before making an entry, you’ll get a much clearer view.

The Market
If you remember what took place during last NFP release, market didn’t react with much directional bias as the release came out in line with expectation.

We’ll probably see similar reaction in the market if we were to get an in-line with expectation release, or -100K on NFP and 9.6% on the Unemployment Rate. However, I believe the general market will be focused more on the Private Sector jobs, which are expected at a +47K; simple math shows that the entire -100K drop in the NFP forecast is attributed to the -119K of Census Temporary hiring, and that makes the private jobs growth the real reflection of U.S. employment sector…

Therefore, I’d advice everyone to focus on both headline NFP and Private Sector job growth. If we get around 70K+ in the private sector growth, I think market would really take that as a positive sign for the U.S. economy.

NFP Trading Strategy
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 (-170K or -30K). We’ll wait for a possible revision to the previous release number, which is -131K, 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 9.6% from 9.5% 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 are extremely volatile, and those who are patient will always get a chance to enter with much better entry.

Additional Thoughts
With USD/JPY sitting at the psychological level of 84, with throwing distance of the 15 year high level at 83.50 against USD, it is going to take a very strong momentum to break this level. I have noticed the numerous attempts to break below this level but the general market seems to find support and unable to stay below 84.00. Therefore, I’d consider this level when SELLING USDJPY on a worse than expected NFP release, and possibly skip the trade altogether to avoid whipsaw.

Looking at the NFP, there are a few indicators pointing for a better than expected release despite the surprise -10K release on ADP report this Wednesday. We’ve got better ISM Manufacturing PMI which indicated strong employment component, a slightly better initial Jobless Claims, higher consumer spending, and general rise in Consumer Confidences…

Although one could argue that the negative ADP report and the uncertainty of government Census job cuts could skew the NFP result to a worse figure, most traders should be focusing more on the Private Sector jobs rather than the headline NFP.

Pre-News Consideration
I strongly suggest that any pre-news trade be closed at this moment. As with NFP releases, liquidity will die down from now until the actual release time because most traders are likely to sit on the sideline.

DEFINITION of NFP
“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.”