Brian Dolan
Chief Currency Strategist Jacob Oubina
Currency Strategist

Research Note: February US Employment Report (NFP)

Summary Outlook: (March 5, 2009) We look for February headline nonfarm payrolls tomorrow to decline by a steeper than expected -685K (consensus at -650K) and the unemployment rate to match the market estimate, rising to 7.9% from 7.6% prior. Our trading strategy is in EUR/USD, where we expect the pair to mirror the price action in previous NFP releases - essentially looking for a reversal in the initial knee-jerk move.

Trading Strategy: The immediate price action in EUR/USD over the last six NFP releases has been quite orderly. Interestingly, the pair seems to care little as to whether the actual result beats or misses expectations. Looking back at prior releases and the price action in the ten minutes immediately following, the knee-jerk move (whether up or down) looks to max out at an average of 50 pips away from the 8:30am ET price. Within the ten minute window, the pair was sitting about 40 pips on average in the opposite direction of that move. Assuming similar behavior this time around, it would make sense to wait for a 50 pip move post number and then go the other way once that is established. We would then look to lock in profits at 40 pips and use a trailing stop beyond that. Given that past price action is not always perfect in projecting potential future behavior, we would preferably implement a tight stop for our initial entry.

Data Analysis: The data we have in hand points to a weaker than expected NFP result of -685K. Initial jobless claims jumped to 642K in February from 584K prior while continuing claims edged up to 5.1 million from 4.8 previously. This week we also got the February ADP employment report and it was dreadful, showing a -697K drop in private payrolls. Using that metric alone would suggest an NFP decline closer to about -725K. The one component that kept our model above -700K was the ISM employment composite index. While the manufacturing portion slipped to 26.1 from 29.9, the services employment component jumped to 37.3 from 34.4 - the highest since October, when payrolls really started to precipitously decline. The news for the unemployment rate has not been good either. Along with higher jobless claims, the Conference Board’s labor differential (jobs plentiful minus jobs hard to get) plunged to a new cycle low of just -43.4 from -34.0 in January. This metric tracks unemployment quite well and, along with the sharp increase in claims, suggests the rate will jump to 7.9% from 7.6% prior.

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