NFP Preview: Upside Surprise Could Hurt Dollar – 3


The Non-Farm Payrolls report for June is expected to be the fourth consecutive weak report. However, there are 4 signs pointing to the other direction.

Update: the actual figure is +80K –  a small disappointment – EUR/USD falls.

For the dollar, the story is different in the current environment. Here are 4 reasons for an upside surprise and 3 scenarios for the result and the expected market reaction.

Official expectations stand on a gain of around 100K jobs after last month’s disappointing gain of only 69K and the accompanying downwards revisions.

Fresh indicators point a better picture:

  1. Services employment improving: the ISM Non-Manufacturing PMI came out below expectations at 52.1 points, but the employment component rose, pointing to stronger growth in hiring. Services (non-manufacturing) is the biggest sector in the US.
  2. ADP better than expected: the independent report for the private sector is not always directly correlated with the private sector component of the NFP. Nevertheless, it tends to point to the trend. The gain of 176K jobs was far better than expected (+103K) and better than last month’s +136K.
  3. Manufacturing jobs growing: The ISM manufacturing PMI fell under 50 points – contraction zone. Nevertheless, also here the employment component remained strong, pointing to more hiring, at over 56 points.
  4. Jobless claims remain under 400K: The weekly barometer dropped to 374K after sitting at around 385K during June. A level of under 400K is considered sufficient for keeping unemployment from rising.

OK, so the report could exceed expectations, but how is that that good for the dollar?

Earlier in the year, better economic indicators lowered the chances of QE3 (aka more dollar printing) and strengthened the US dollar. Weak figures raised the chances and weakened the greenback.

After over a year without additional QE, the chances are becoming lower. The extension of Operation Twist at the end of June just served as a substitute for expanding the Fed’s balance sheet.

The current environment is totally different

The NFP publication comes one day after 3 important central banks introduced more monetary easing: the Bank of England announced more QE (50 billion pounds) and laid out a gloomy outlook. China surprised with a rate cut.

The European Central Bank made the move with the biggest impact: it lowered the rate to a new historic low and also cut the deposit rate to 0% – nothing. In the accompanying press conference, Draghi was quite gloomy about the euro-zone.

In this environment, all eyes are on the US, to become a locomotive of global growth: a stronger US means more appetite for “risk” assets such as stocks, the euro, the Aussie, kiwi, pound and others. And, it lowers the appetite for safe assets such as the US dollar and the Japanese yen.

So, here are three scenarios for the immediate reaction to the Non-Farm Payrolls:

  1. +70K to +130K: Within expectations – lots of usual NFP madness without any big moves. This scenario has a medium probability.
  2. Above +130K: Good news – the dollar and the yen fall and others gain. This scenario has higher probability now. This may not last too long though.
  3. Under +70K: Bad news – the dollar and the yen gain on global gloom. This has low probability, but bad news can never be excluded in the current environment.

The unemployment rate isn’t expected to move from 8.2%. Unless it jumps above 8.5% or below 8%, this figure will play second fiddle to Non-Farm Payrolls.

In any case, it’s important to remember that this is a very wild event, and you should trade with care. See the 5 Notes for Trading the Non-Farm Payrolls.

Another note: Canada also publishes its employment data at the same time, so trading USD/CAD is a bit risky, to say the least.

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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.



    the author being a bit simplistic: assumes USD will behave purely as safe haven asset, up on bad news, down on good news. Not necessarily so, because Fed focused on jobs and spending as key metrics for when to raise rates. thus we have seen multiple incidences when US monthly jobs surprised to upside and we saw BOTH stocks and USD rise, because stocks rise on improved optimism, USD rises on improved expectations for interest rate increases, which in turn would raise expectations for rising USD

    Big upside or downside surprises from US Jobs reports are one of the few data points that can have the USD AND stocks/risk assets moving together despite their normal inverse correlation. Note this.

    • Thanks Cliff. Indeed, we can see a rise in both stocks and the USD, yet I believe that today we’ll see them move in opposite direction. We’ll soon know. Markets are quiet before the storm…

  2. thanks yohay for the SIMPLE explanation on the upcoming NFP release…when trading currencies, a simple analysis and presentation like this is all one needs to have a solid trading plan going into a very important news event like the NFP…SIMPLE translates to CLARITY…please keep up the good work…i will continue to read your articles because they have always helped me in my trading..

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    Easy bro, no disrespect meant to Yohay, of whom I’m a fan. This is all collegial here, honest disagreements for the sake of truth (& profits).

    After 20 years of marriage to same woman (of exacting standards)I assume most folks can take constructive criticism, especially someone as accomplished as Yohay.

  5. muhammad mduasir on

    aha thanks yohay to give some clue before the announcment NFP

  6. Won’t a print under 70k give the green flag to QE3……..weakening the dollar?
    Or do you believe that will be the market’s second thought (post the algo’s)?

    • Thanks Utis. I think the bar for QE3 is very high – a clear threat of deflation or rising long term borrowing costs could push the Fed to action.
      The markets could have lots of thoughts – NFP is a wild event, with algos and traders going crazy…

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