FX Outlook for 7/8/11: Pre NFP

I'm expecting tomorrow to be the biggest trading day of this week, notably because of US employment and payroll data. CAD also has some important employment data, so there should be some fireworks early on tomorrow morning in all markets.



Last time the NFP came out in May we saw very disappointing results (added 54k with expectations of 170k, unemployment rose to 9.1%). Afterwards, just about everyone sold dollars for the rest of the day. This time around, were expecting an increase of at least 100k with some expecting the number to be as high as +175k. Since there has been a string of good US data lately on top of recent strength in the US markets, I believe the markets have already accounted for these payroll and unemployment figures, so in order for the data to be bullish for the dollar they must come in significantly higher than expectations. Sure, we will probably see a nice pop even if they are in line with expectations, but it may not carry through the day. On the other hand if we see data well below expectations, I'm expecting a hard dollar selloff. The SPY and IWM are both near significant resistance and have just seen strong runs in the past two weeks. There could definitely be some panic selling in US markets if bad numbers come in. I have a hard time seeing either the SPY or IWM moving through resistance unless we see some extremely good numbers, but I'm not expecting it. The dollar index, which is still in a very long term downtrend, looks to be flattening out a bit and showing a little bit of strength.



Some predictions for dollar-denominated pairs:



The EURUSD has been consolidating on the daily's for some time now, and off line data could set us off in one direction or the other. The euro has been struggling to stay afloat as the ECB raised key interest rates and Portugal received a downgrade earlier this week. If the numbers come in at expected or higher, I think we’ll definitely start selling off. The next support looks to be around 1.4140, so that could be a good initial target.



The AUDUSD has moved higher in the past two weeks due to US market strength and investors seeking higher yields. If dollar strength continues, this move higher could very well continue. We’ll definitely be running into some traffic on the upside though, so keep that in mind. If data comes in weak, there are at least 100 pips of possible downside that we could see today, depending on how much we come up short. Short-term downside support looks to be around 1.0725, then 1.0680, then 1.0650.



Another pair I’d be interested in in the long term if we see good US data is the USDCHF. This pair has been trending down forever and while it hasn’t quite broken out of the downtrend yet, it may have found some support near 0.8325. This is a very well-defined and obvious trend that people will be looking at, so I think there is nice upside potential if we can break out. Strong NFP numbers may be a perfect catalyst for this to occur.



All of the dollar denominated pairs will be in play this morning; these are just a few I will be following a little bit more closely. I always try to avoid any exposure before huge data like this, and I like to wait 15-20 minutes at least to let any type of kneejerk play out. Don’t chase moves you’ve missed, just be patient and wait for pullbacks. And finally, remember to listen to the market and take what it gives you! Be flexible, because it’s easy to get burned if you’re stuck on a particular idea. Any questions, please feel free to ask. Happy Trading!

Trading an Economic Report

           Since plenty of traders including myself look for spots of increased volatility to make a quick move, I figured I’d put together a post about to set yourself up for a successful trade after an economic event or report.  On the eve of the May NFP’s, it seems appropriate.

           In my opinion one of the most important things to gauge before an event is the expectation of the markets.  Just about anywhere you find an event calendar, you can find a value economists have determined to be the ‘expected’ result of an event.  Tomorrows NFP number has had a general expectation of +170k, but many have already agreed that there’s a good chance the report will come in much lower than that.  Many estimates have already been updated to reflect a lower expectation since this week’s poor ADP numbers (probably closer to +125k or less), and the market has been processing these expectations.  Now let’s say that the actual number comes in around +100k.  While this is much less than the originally anticipate +170k, you might not see the reaction you’d expect when a number as important as the NFP’s comes in that much lower than expectations.  This is because the market has already accounted for much of the difference.  By understanding the true market expectations, you can prevent yourself from getting on the wrong side of a freight train.

           Another thing that’s almost guaranteed to rip you up is trying to anticipate the market’s reaction and get in before the event.  This is basically gambling in my opinion, unless you have some sort of strategy for doing it.  Even if a report comes out exactly how you expect it to, the market doesn’t always act accordingly.  It’s much safer to let the initial kneejerk pass before trading.  Even if you miss the initial move, there usually are plenty of opportunities to safely enter and profit.

           Understanding the event is another key to success.  Different events often have different types of reactions for different pairs.   Some events cause pairs to take off within seconds of the release and never look back, while others take 10-15 minutes to really pick a direction.  For example, the most important part of the RBA minutes is the last sentence, so you might not see a real reaction until the report is fully read.  Also know what pairs will be in play after a report.  You probably won’t see as much volatility trading a yen cross when the BoE announces new rates. 

           Identify your key levels before hand, prepare for all possible scenarios, and understand overall market sentiment.  Be patient and get good entries, but don’t be hesitant or you will get left behind.  There is plenty of quick money to be made trading off events, so you have to know how to take advantage of them.

          Below is a 5 minute chart showing how the EUR/USD reacted to the April NFP's that came out last month.  HUGE move.  I'm pretty excited to see what happens tomorrow morning.  Good luck to everyone trading it!

EUR/USD, 5 min, 5-6-2011