It’s the first week in the month, and Friday brings the king of forex – Non-Farm Payrolls. We’re expecting to see another significant drop in jobs – still the after-effect of the government census, but also a reflection of the slowdown. Here’s a preview for this major release, including things to watch out for, and expected markets reactions.
This is the most volatile event for currency traders, especially in EUR/USD in USD/JPY, which are most vulnerable to American releases. I recommend reading my 5 notes for Non-Farm Payrolls trading, especially for new traders. Let’s see what’s expecting us now:
Importance of Private Sector Numbers
In May, Non-Farm Payrolls jumped by 433K. This result, the highest gain in a long time, was expected. In May, the US government held the decennial census, hiring hundreds of thousands of people. This hiring began many months beforehand and reached the climax in May. So, even a bigger gain was expected. The big disappointment came from the private sector, that hired a small amount of people – this is the real problem.
In June, there were expectations for a “hangover”, due to the government’s release of all the temporary workers. And this drop, of 125K, was worse than expected, also due to weak hiring by the private sector.
The census effect is slowly fading away, but the change in jobs in the private sector will still play a big role, alongside the overall number. Expectations for the headline number are for a loss of 75K jobs. A loss of more than 100K will be a disappointment, while a loss of under 50K or even a gain in jobs will be a good surprise. But it’s important to note the change in the private sector – a gain in jobs will be good, and a loss will be bad.
With the private sector change being important, the independent ADP Non-Farm Payrolls, released on Wednesday, will receive special attention. This isn’t always the best indicator for the headline number of the NFP, but as it’s a report for the private sector, it’s importance is high. A gain of 36K jobs is predicted here.
Regarding the unemployment rate, its role became more subtle. Changes in the unemployment rate don’t necessarily reflect the economy, but rather statistical changes. In many cases, we’ve seen confusing figures – a gain in jobs with a rise in the unemployment rate, and the opposite – a drop in jobs together with a drop in the unemployment rate.
The unemployment rate will play a role only if it rises to 10% – the double digit psychological level has a strong effect on currency markets. In the other direction, only a drop to 9.2% or lower will be a positive sign. The rate likely to be something in the middle, ticking up from 9.5% to 9.6%, leaving the scene for the Non-Farm Payrolls.
A related figure is the weekly unemployment claims. Here, we’ve seen rock steady releases in the past few months, between 440K to 480K. If this Thursday’s number is out of this range, this could affect the preparations for the NFP, but this is highly unlikely. In the sole occasion when the number stood on 429K, it was quickly dismissed as a miscalculation.
In the past month, we’re back to “normal” market reaction – no risk factor. This means that the dollar falls on weak US figures and rises on good ones. This applies to “risky” currencies such as the Euro, Pound, Aussie, loonie and kiwi, as well as the so called “safe haven” currencies such as the Swissy and the yen.
Note that the initial reaction, and the strong moves that occur before the release, don’t necessarily reflect the direction that the market will take later, towards the close of the week, and into the new week. I’ll mention again – the private sector number in the Non-Farm Payrolls still plays a big role – a gain or a loss here can determine a gain or a loss for the greenback.
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