Time of release: 02/01/2008 13:30 GMT, 08:30 EST
Primary Pair Impact : EUR/USD
Expected: 70K
Previous: 18K

How To Trade This Event Risk

The dollar is almost across the finish line on one of its most event-risk intense weeks in months. However, before the weekend liquidity drain, dollar traders will have to absorb the top market-moving, non-farm payrolls report. And, given that many of the majors are positioned right against market-defining levels of dollar support. Heading into Friday’s release, official and speculative forecasts have clearly taken diverging paths. The consensus among Wall Street economists is calling for a 70,000 jump – a reading that would effectively temper the negative sentiment surrounding last month’s release, which was the weakest print from the series since August of 2003. Supporting this aggressive forecast was the Wednesday’s ADP release. Though the private payrolls report’s correlation to the government numbers has seen considerable volatility in the past, its 130,000 print was more than three times the market’s forecast and should not be ignored. In fact, Deutsche Bank revised its projection from 70,000 to 160,000 after the ADP number. Despite these somewhat bullish forecasts though, ancillary economic data has not supported a similar outcome. After the fourth quarter GDP number crossed the wires matching its worst pace in five years, the possibility of a recession became very real. Should the consumer sector falter, it may very well tip the US economy. Looking at the usual round of employment numbers that proceed the NFPs, the picture isn’t promising. Initial jobless claims marked their biggest drop since Hurricane Katrina last week, the 4-week moving average on continuous claims is hovering near a two year high, the Hudson employment index held at its record low and consumer confidence just barely held off a two-year low.

Predicting the outcome of the January NFPs is only the first step – and perhaps the easier one. Even if the headline print were known, the market’s reaction will likely be difficult to discern in the throes of volatility. In looking for a long dollar (EURUSD) position, we will be fighting the economic trend. As growth threatens to dive into a recession, the market is keeping an eye out for the fundamental indicator that will signal the turn. A strong employment report may be considered forestalling the inevitable. Therefore, we will look for a strong reading on the labor data across the board. A 100,000-plus print on the headline, a steady or improved jobless rate and a pick up in wage inflation. On the other hand, we don’t want a blow out number, as this could sabotage follow through. With the right fundamentals, we will go long after closing a red, five minute bar and put an initial stop at the nearby swing high (or reasonable distance). Our first target will equal this risk, and the second will be discretionary. To preserve our profit, we will move the stop on the second to breakeven when the first target is hit.

Alternatively, a disappointing NFP number would align to the bearish economic trend – though the impact will have to be great enough to push EURUSD through major resistance. We will follow the same strategy as above for a long trade, just reversed.

Antonio Sousa is a Currency Analyst for FXCM.