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Research Note: July US Employment Report
Brian Dolan, Chief Currency Strategist
Summary Outlook: On Friday August 7, 2009 at 0830EDT/1230GMT, the US July Employment report will be released. Consensus forecasts are for a -328K NFP job loss (prior -467K) and an increase in the unemployment rate from 9.5% to 9.6%. We think the NFP reading will be a touch worse at -355K and that the unemployment rate may rise to 9.7%. The revisions to prior data will be important, as June NFP saw an outsized drop relative to May (May -322K; June -467K), leaving some uncertainty about the overall trajectory of job losses.
We think the current environment is one where risk sentiment has improved substantially, but is in need of reinforcement if gains in risky assets (stocks, commodities, carry trades (long cross-JPY)) are to be extended and sustained. We think a NFP loss of -300K or fewer will embolden risk appetites and see risky assets gain ground, while a NFP change of -400K or more may see risk assets retreat. The change in the unemployment rate is likely to act as an amplifier/dampener to the change in the NFP.
Trading Strategy: Risk assets have come up substantially in recent weeks and are sitting just below key resistance levels. We think a solid improvement in jobs data could propel risky assets to new highs, but we will be wary of a buy the rumor/sell the fact reaction. A weaker than expected jobs report is more likely to see risky assets move directly lower, as more intense profit-taking impulses emerge.
In currencies, we would expect USD/JPY to reflect most clearly the outcome of the employment report, where more positive jobs data would likely see USD/JPY move directly higher and worse jobs news would see USD/JPY move directly lower. The important levels to watch are 94.00/20 on the downside and 95.80/96.00 on the upside. In other key USD pairs, we would note that the highs for the YTD of the following were broken recently and that these levels are now key support: EUR/USD 1.4320/40, GBP/USD 1.6730/60, and AUD/USD 0.8320/40. Similarly, new lows for the year were registered in the following pairs and are now important resistance: USD/CAD 1.0780/1.0800 and USD/CHF 1.0680/00. Most importantly, we will note the pre-NFP levels of the USD pairs, and if those levels are broken on a reversal of the initial post-NFP reaction, we would go with the reversal. (For example, if EUR/USD is at 1.4380 pre-NFP, and better jobs data ensues, and EUR/USD moves higher to 1.4430 but then reverses back below 1.4380, we would look to sell EUR/USD.)
Data Analysis: Weekly jobless claims data over the course of July averaged about 60K less/week than in June, but the July numbers were distorted by seasonal adjustments and the earlier auto factory shutdowns, making comparisons difficult, but they do suggest a smaller NFP decline. The July ADP employment report showed an improvement of about 90K over June, suggesting a potential NFP improvement of about 110-115K over June counting in government jobs, which translates to approximately -355K NFP. For the unemployment rate, the drop in the Conference Board's labor differential (jobs plentiful minus jobs hard to get) to a new low for the current cycle suggests a potential acceleration in the rise in the unemployment rate, which may see an above consensus increase to 9.7 or even more.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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