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FX Traders: Here’s Our Guide To Trading July Nonfarm Payrolls

By Kathy LienForexJul 03, 2019 01:48PM ET
www.investing.com/analysis/fx-traders-heres-our-guide-to-trading-july-nonfarm-payrolls-200436891
FX Traders: Here’s Our Guide To Trading July Nonfarm Payrolls
By Kathy Lien   |  Jul 03, 2019 01:48PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup July 3, 2019

The U.S. nonfarm payrolls report is always a big mover for the U.S. dollar and all of the major currencies but this month’s report could be more market moving than usual. First, participation is lower with many U.S. traders off for the July 4th holiday weekend. This is the most popular weekend for summer vacations and trading desks are generally staffed with junior traders who are unlikely to take major positions. However this NFP report is also a very important one because last month, the Federal Reserve said they are close to cutting interest rates but how quickly they move depends on data. In that case, there’s no single economic report as important as the jobs report. If job growth falls short of expectations, the market could immediately move to pricing in a July interest rate cut. While Fed fund futures are discounting 100% chance of easing this month, the modest decline in the dollar since the June 19 meeting is a sign that FX traders are unprepared for a cut. So if the jobs report is weak, we could see a broad-based decline in the greenback.

Part of the reason why the U.S. dollar is not significantly weaker is because job growth is expected to recover this month, a prospect confirmed by U.S. policymakers like Fed President Bullard. Last month’s report was ugly with only 75K jobs created in May. Wage growth also weakened for the third month in a row. While there’s no doubt that the U.S. economy is slowing, it is hard to imagine that less than 80K jobs were created two months in a row. With that in mind, the greenback should be trading much lower given the recent decline in Treasury yields – 10-year rates fell to a 2.5 year low on Wednesday.

Taking a look at the leading indicators for nonfarm payrolls, the outlook for the labor report is mixed. While ADP reported an increase in private sector payroll growth, the rise was less than anticipated. ISM reported weaker job growth in the service sector last month but they incorrectly predicted stronger growth in May so this could be a correction of last month’s misalignment. Confidence is down across the board and the 4-week moving average of jobless claims increased. The primary reason why job growth is expected to be stronger is because last month’s report was so weak.

Arguments In Favor Of Stronger Jobs Report

1. ADP rebounds to 102K vs. 41K
2. Challenger Layoffs at 12.8% vs. 85.9% month prior
3. ISM reports rise in manufacturing jobs
4. Continuing Claims Drop

Arguments In Favor Of Weaker Jobs Report

1. ISM reports weaker job growth in June (but miscalled stronger growth in May)
2. 4-Week Moving Average of Jobless Claims Rises
3. Consumer Confidence Index Drops 10 points in June
4. Lower University of Michigan Consumer Sentiment Index

When it comes to trading NFPs, the absolute amount of job growth is not the only thing that matters. Revisions, average hourly earnings and the unemployment rate are all important. This month, economists predict 164K job growth, average hourly earnings of 0.3% and a steady unemployment rate of 3.6%.

Scenario #1 – If nonfarm payrolls exceed 165K and wage growth rises by 0.3%, the best currencies to trade will be EUR/USD, AUD/USD and NZD/USD. The ECB may not be ready to cut interest rates in July but easing later this summer is certainly on the table. The Reserve Banks of Australia and New Zealand have also made it clear that further rate cuts may be necessary this year. They are the 2 most dovish central banks and their currencies are the most vulnerable to a correction on the back of a good U.S. jobs report.

Scenario #2 – If nonfarm payrolls rise between 135K to 165K but last month’s numbers are revised materially higher, the U.S. dollar’s reaction will be determined by the pace of wage growth and the unemployment rate. If the rest of the components are strong, we should also see the dollar rise against the euro, Australian and New Zealand dollars. USD/JPY will rally as well but this pair is less attractive because investors could question how much of a difference a muted increase makes for the Fed.

Scenario #3 – However if payroll growth is less than 135K and there’s no material upward revisions to the May report and wage growth fails to accelerate, then the best pairs to trade will be USD/JPY, which could drop below 107 and USD/CHF, which could fall below .9750. If the labor-market report is mixed with job growth accelerating but wage growth slowing or the unemployment rate rising then the dollar’s reaction depends on a bigger surprise.

USD/CAD will also be on the move with Canadian labor-market numbers scheduled for release. Canada’s economy has been on fire but in the context of slower global growth and a very strong currency it won’t take much to disappoint CAD traders. USD/CAD is trading at 8-month lows and a small miss could trigger a voracious short squeeze ahead of next week’s Bank of Canada monetary policy announcement.

FX Traders: Here’s Our Guide To Trading July Nonfarm Payrolls
 
FX Traders: Here’s Our Guide To Trading July Nonfarm Payrolls

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Jie zhang
Jie zhang Jul 05, 2019 2:20PM ET
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Once again you did a great forecast !
Hanyogo Diego Hander
Hanyogo Diego Hander Jul 05, 2019 7:10AM ET
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English is not my native language but im a trader who wants to know the impact of this NFP, i just wanna say after reading this my brain like going to explode like a nuclear bomb...Please anyone answer me my simple question, Kathy's analysis tell us to buy or sell EURUSD? :)
Hanyogo Diego Hander
Hanyogo Diego Hander Jul 05, 2019 7:10AM ET
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ally Kimodoi alright thanks
Seamus Hayes
Seamus Hayes Jul 05, 2019 3:52AM ET
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Great insight and analysis Kathy , thanks once again
Icon Ye Khaung
iConFX Jul 05, 2019 1:50AM ET
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Thanks for your analysis
Nick Roth
Nick Roth Jul 04, 2019 11:12PM ET
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Thank you Kathy. Great analysis from you as always
Davie Chalira
Davie Chalira Jul 04, 2019 9:13PM ET
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thanks Cathy for the insight
Cynthia Maria Ang
Cynthia Maria Ang Jul 04, 2019 3:50PM ET
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Love your analysis always Kathy
faro Sydney
faro Sydney Jul 04, 2019 2:26PM ET
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thanks Kathy for d information and I wish to know how to trade fundamental
Hench Ichegbo
Hench Ichegbo Jul 04, 2019 2:11PM ET
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google Kathy lien Books
Faith Olatoyan
Faith Olatoyan Jul 04, 2019 1:09PM ET
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Chris MakombeCan you kindly share the title or link to Kathy's book?
Eliabu Allan
Eliabu Allan Jul 04, 2019 8:25AM ET
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thanks kathy for the information
Chris Makombe
Chris Makombe Jul 04, 2019 8:18AM ET
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You are the best Cathy, I use your book for my trading strategies..it works.
Nnenna Ewa
Nnenna Ewa Jul 04, 2019 8:18AM ET
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please, how can I get her book?
Faith Olatoyan
Faith Olatoyan Jul 04, 2019 8:18AM ET
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Faith Olatoyan
Faith Olatoyan Jul 04, 2019 8:18AM ET
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ChrisDo kindly share the title or link to Kathy's book...thanks
Faith Olatoyan
Faith Olatoyan Jul 04, 2019 8:18AM ET
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Chris Makombe!!!
Alexmond Mashinyane
Alexmond Mashinyane Jul 04, 2019 8:18AM ET
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Hi please share the title of the book or a link thanks
Osasuyi Onaiwu
Osasuyi Onaiwu Jul 04, 2019 6:44AM ET
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this is apt thanks Kathy
Alexey Gerasimov
Alexey Gerasimov Jul 04, 2019 2:55AM ET
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Is it kind of meme to thank Kathy everytime in comment section? She is truly a dollar hater
Peter Masilo
Peter Masilo Jul 04, 2019 2:41AM ET
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great substantial
Darren Frayne
Darren Frayne Jul 04, 2019 12:41AM ET
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great analysis!!
Saifullah Sumon
Saifullah Sumon Jul 03, 2019 11:52PM ET
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Very informative thank you !!
Lungile Mnguni
Lungile Mnguni Jul 03, 2019 11:29PM ET
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Your analysis good as always
Fomo Fud
Fomo Fud Jul 03, 2019 10:33PM ET
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thank you for your info.
Ancjhie Ancjhie
Ancjhie Ancjhie Jul 03, 2019 9:33PM ET
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thank you
Fidel De la Cruz
Fidel De la Cruz Jul 03, 2019 8:42PM ET
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Awesome ! You are the Best !
Aaron Legar
Aaron Legar Jul 03, 2019 8:33PM ET
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great analysis
Clive Nkausu
Clive Nkausu Jul 03, 2019 6:40PM ET
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thanks Kathy
Almir Topcic
Almir Topcic Jul 03, 2019 6:27PM ET
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Great
joshua onunwa
joshua onunwa Jul 03, 2019 6:27PM ET
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thank you Kathy
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