By Oren Laurent
President, Banc De Binary
Last week’s US payrolls report showed the unemployment rate was significantly better than expected. Investors were briefly inspired by boosting equities and risky currencies, although the effects were short-lived.
US non-farm payrolls added 114,000 jobs in September, indicating a surprising growth by an average 146,000 per month in Q3, compared to 67,000 in Q2. Further to this, back revisions added another 86,000 to the July-August payrolls gains. Although the figures were much higher than predicted, gains started decelerating as the latest quarter progressed.
Other detail was mostly positive in the September report. The separate household survey found 873,000 new jobs following declines earlier in Q3 for a 186,000 average monthly gain in the quarter. This was enough to push the jobless rate down from 8.1% to 7.8%, its lowest since January 2009. Encouragingly, hourly income rose 0.3% in September and hours worked were up 0.4%, implying decent earnings growth in the month. The industry detail showed factory jobs down two months running, but temps and information were the only other sectors to record (modest) payroll declines.
Why we care
The unemployment rate is the single most popularly used figure to give a snapshot of labour market conditions. In the US it is released with the widely followed and market moving US Employment Situation report, which includes changes in non-farm payrolls as well as other key indicators of the US labour market.
As central banks act under intense pressure to keep unemployment under control (as well as mind inflationary pressures), high unemployment often puts downward pressure on interest rates affecting the rest of the economy. As a result, the central bank looks to bolster the economy to remedy the employment situation.
More generally, unemployment is indicative of the economy's production, private consumption, workers' earnings and consumer sentiment. A lower unemployment rate translates into more employed individuals with paychecks, which leads to higher consumer spending, economic growth and potential inflationary pressures. Conversely, high levels of unemployment are connected with lower income, lower spending, and economic stagnation.
How to Trade Unemployment
1- Trading NFP means trading the USD/CHF, Gold, or both.
These markets move the best in response to the NFP. While it is true that other currency pairs also move (EUR/USD, GBP/USD), experience shows that NFP results move the USD/CHF and Gold the most because they directly impact expectations about US stimulus.
Remember- Good data is Dollar Positive because it means stimulus may not be necessary.
Remember- Bad data means Gold Positive, because it means more stimulus is expected.
2- Listen to the Market: It’s not the NFP data that is key- it’s the market response to it.
3- Very important: The NFP trading is more than 1 Trade- It can be at least 3 trades.
Below I have listed 5 scenarios for the next NFP Trading:
NFP TRADING STRATEGY EXAMPLE USING USD/CHF
(SCENARIO 1 - USD/CHF BREAKS RESISTANCE)
On the release of the news, you will see a break. Remember don’t trade before the news, that is a major risk (uneducated guess). On the break is trading with maximum momentum. In the following example, the scenario is a break upward for the USDCHF
TRADE ACTION: BUY CALL ON USD/CHF NEXT EXPIRY
(SCENARIO 2: TRADING A BREAK DOWN OF THE USD/CHF IN RESPONSE TO NFP)
TRADE ACTION: BUY PUT AS SOON AS USD/CHF BREAKS DOWN
(SCENARIO 3: TRADING NFP AFTER THE INITIAL BREAKOUT WAVE)
Always have an extra trade when the initial response to NFP is over. There is always an end to the initial move.
TRADE ACTION: If the USDCHF first breaks above resistance, wait for it to stop moving up , and then when it reverses down, buy PUT on NEXT EXPIRY.
(SCENARIO 4: END OF DAY TRADE)
SCENARIO 5: GOLDEN OPTION
Trading Gold is exactly the same as trading the USDCHF. Gold will be sideways until the NFP results are released.
FACT BOX: INTERNATIONAL UNEMPLOYMENT RATES WORTH KNOWING
Hong Kong 3.2%
Russia 5.4% (was 10.6% in 2000)
United Kingdom 8.1%
United States 7.8%
FACT BOX: NON-FARM PAYROLLS
Measures Change in the number of employed people during the previous month, excluding the farming industry;
Usual Effect Actual > Forecast = Good for currency;
Frequency Released monthly, usually on the first Friday after the month ends;
Next Release Nov 2, 2012
Notes This is vital economic data released shortly after the month ends. The combination of importance and earliness makes for hefty market impacts;
Care Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity;
Also Called Non-Farm Payrolls, NFP, Employment Change;
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