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The American job market has reached a turning point, where a gain in jobs is at a hand. In this preview, there are arguments for both options, expected market behavior and possible strategies for trading this major news event.

In a previous post about forex binary options, I’ve shown how a binary option can be used to hedge a breakout of a pair. Towards the upcoming Non-Farm Payrolls due this week, I’ll show how to hedge this event, in any case.

Expected forex market reaction

American Non-Farm Payrolls for November have been excellent: only 11,000 jobs were lost in the US. This was far better than a loss over 100,000 that was expected. It was accompanied by an upwards revision of the previous release and a drop in the unemployment.

This was no ordinary NFP release.

During most of 2009, good news would send the dollar down. Why? Risk appetite. Hopes of global recovery would send traders to more “dangerous” currencies. Bad economic news from the US would send the dollar higher on risk aversion. Fear of ongoing trouble would send traders to the “safe haven” currencies such as the Yen and the US dollar.

On December 4th, this correlation was broken. Good American news translated into a dollar rally. The markets went back to normal. During the rest of December, normality continued to rule. This also meant that the stock markets and the dollar moved together, contrary to the behavior between March and November, where the dollar would fall when stocks rose, and the dollar gained on stock market weakness.

This “normal” behavior is expected to continue in the upcoming Non-Farm Payrolls release for December 2009, due on Friday January 8th.

Will two years of job losses end now?

The current expectations are for a very small drop in jobs – only 1,000. This reflects the median of 58 economists. As this number is very close to zero, some economists are expecting job gains, the first in 2 years.

Arguments for a rise in jobs could be found in the continuing drop in weekly unemployment claims. Last week’s number went down to 432K, the lowest since August 2008, before the collapse of Lehman brothers. It could also be supported by the official end of the recession in the US.

Such a positive outcome of job gains, even if the number is very small, will have a great impact on the market. The dollar will probably celebrate such an event and rise across the board.

The preferred reaction, in this case, is to go long on the dollar while hedging this with a binary option that will go against the dollar. For example: short on EUR/USD with a CALL option on this pair. In case the markets turn around and the dollar falls, the binary options will defend against this loss.

The skeptic scenario

But not everybody is optimistic. Many say that last month’s good result was due to a rise in temporary and part time jobs, not in real full-time positions that have a long term effect. This pessimistic view sees a renewed drop in jobs, and a long road to recovery.

Some reason the good figures with the government’s special stimulus spending. They claim that when the government’s programs end, the sector that was helped goes back to “normal” – back to recession. The fall in new home sales is explained by the end of a government program in this field.

In case the NFP is negative once again, the dollar will fall. In this scenario, the preferred way is to go short on the dollar, and to hedge it with a binary option with the dollar. For example, going long on EUR/USD together with a PUT option in case the dollar surprises and gains.

I’m optimistic. I hope that jobs are gained in the US, and that the global economy will really pull out of this recession.