7 Scenarios for Non-Farm Payrolls and Market Reaction

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Non-Farm Payrolls for August are expected to show another big drop, but with a gain in the private sector, showing that growth still continues. Here’s a preview for this release, the “king of forex trading” with 7 possible outcomes and expected market reactions.

This is the most important event in forex trading, and has unique characteristics. I highly recommend reading my 5 notes for Non-Farm Payrolls trading, and especially advise newbie traders to be very careful. Now, let’s see what’s awaiting us now:

NFP Background

During August,  many disastrous indicators have been released. Housing has been the biggest issue, with a huge slump in home sales, showing that without stimulus measures from the government, US real estate is in the gutters.

The sharp downwards revision of GDP for Q2, from 2.4% to 1.6%, also weighed heavily. The biggest impact came from Ben Bernanke – the FOMC stated that economic growth was “more modest” than expected and renewed the Quantitative Easing steps by buying government bonds.

This was already too much, and the dollar changed direction – from falling on bad US figures, to rising on the return of risk – fears that the US will drag the world down sent traders to the safe haven dollar, and also the Japanese yen.

Growth and Employment

The key to growth is employment. In a post about the real unemployment rate, I’ve written that while employment usually lags new growth, its taking too much time. Weekly jobless claims, a great indicator for the Non-Farm Payrolls, already passed the 500K mark during August, but fell back down to 472K this week.

Since February, the government’s decennial census continues to impact the headline figure. The government hired hundreds of thousands of people towards the census in May, and is releasing them gradually. As of July, there were 200K people employed around this huge project. Many of them were dismissed during August. This is what weighs on the overall figure and makes it negative.

So, yet again, the focus will be on the private sector change. In July, we’ve seen a gain of 70K. According to the wide Bloomberg survey, a gain of 40K is expected now. But, as noted by Kathy Lien, this wide survey also brought very wide results – the ranges are huge.

We got a hint on private sector payrolls from the ADP report on Wednesday. The correlation between both figures is far from perfect. Nevertheless, as the focus is on the private sector, the unexpected loss of 10K jobs reported by ADP is very worrying.

This loss could also be reflected in the official Non-Farm Payrolls figure, making the headline number surpass 150K, raising the fears of a double-dip recession and triggering risk aversive trading – dollar positive.

Here are 5 scenarios for the Non-Farm Payrolls and their effect on the dollar:

  1. NFP at -100K, private sector +40K – exactly as expected. Choppy trading but no significant move.
  2. NFP at -70K or better, private sector at +70K or better – better than expected. Dollar gains sharply.
  3. NFP at -70K or better, private sector at +40K – better than expected – dollar gains.
  4. NFP at -70K or better, private sector unchanged – surprising but mixed – dollar stalls.
  5. NFP at -150K, private sector at +40K – disappointing but not too bad – dollar retreats.
  6. NFP at -150K, private sector unchanged – disappointing – dollar falls.
  7. NFP at -150K or worse, private sector at -40K or worse, a significant loss of jobs in the private sector. This is the worst case scenario that will raise the talk of a double dip recession. In this case the dollar will gain on risk aversion.

What do you think?

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

5 Comments

  1. Torsten Kroeger on

    Hi,
    to read your 5 scenarios according to #2+#3 i.e “better than expected” why would dollar gain? Also contrary to #6+7.
    If one of both alternatives would come through this will move S&P and Dow to the upside and my view tells me >risk on >dollar falls

    Regards,

    Torsten

  2. Hi,
    good stuff…sure, but I think that a better than expected numbers like scenario #2 & #3 will be against the dollar and the yen;
    I carefully agree on scenario #5; disappointing bat not too bad should be against dollar, since other currecy my be seen better;
    about #6 & #7 I would say that in both cases the dollar should advance: in the last week it happends that the euro gained against the dollar on risk adversion anwinding, I think these money may go back for a bearish Eur/Usd in the last two scenario.
    Anyway, yes I would be really carefull today and I would watch my trades in case of an open position;
    also If I think a move up on Eur/usd will be bigger than a bearish move.
    good luck to everibody

  3. @Torsten, thanks for your comment. My assumption was that slightly better than expected will help the dollar and slightly worse than expected will hurt the dollar. On a result that is much worse than expected, this already has the opposite effect – fear that the US will drag everybody down sends traders to “safe haven” currencies like the dollar. It’s absurd, I know, but that’s what happens. I hope this answers your question.

    @domenico, thanks for your comment. I certainly agree that everybody should be careful with this event. We already see an opposite V-shape in USD/JPY.

    @TheMarketSniper thanks for your comment. Currently we see a rise in the Euro, but it’s based on the bad US ISM figure. Regarding spelling, I’ll check out the option you’ve offered.

  4. Pingback: Non-Farm Payrolls Preview October 8 - Positive Jobs, Dollar | Forex Crunch