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Research Note: August US Employment Report
Jacob Oubina, Currency Strategist
Summary outlook: (September 3, 2009) We look for August headline nonfarm payrolls tomorrow to decline by a steeper than expected -290K (consensus at -230K) and the unemployment rate to rise a touch above market forecasts to 9.6% from 9.4% prior. With inter-market correlations seemingly back on in September, we would expect a number approaching the -300K mark to elicit another flight to safety.
Trading Strategy: Under a scenario of a much weaker headline NFP and a higher unemployment rate, we would expect the yen crosses, EUR and to a lesser extent gold and silver to trade lower. EUR/USD tested the air above 1.4330 where a ton of stops seemingly lurked in early NY trading Thursday. Fundamentally, ECB President Trichet sounded extremely cautious about the economic outlook - looking for a "bumpy road" ahead. Couple that with the fact that EUR/USD has a positive correlation with US equities of nearly 90% and you have a recipe for EUR weakness on any further ratcheting down in risk. Selling EUR/USD on strength into 1.4300/50 and targeting a move back towards the 1.4200 area makes sense in our view. The precious metals are also likely to come under pressure in a weaker NFP environment. Underpinning the rally in gold and silver are inflation worries after the ISM services and manufacturing prices paid prints above 60. The fact that yields have not followed higher, however, should give the gold and silver bulls some pause. My only reservation about calling a lower gold is that momentum is hugely positive at the moment. That said, we have thus far failed to close above important daily trendline resistance near 991/992 and so the downside potential is there.
Data Analysis: The data we have in hand points to a weaker than expected NFP result of -290K. Initial jobless claims jumped to 571K in August from 556K prior while total continuing claims (State and Federal programs) remained stubbornly high at 9.2 million through mid-month. This week we also got the ADP employment report and while it was better than last month, it still showed a massive -298K drop in private payrolls. The other factor that will probably intensify losses is a technical one. I think that seasonal factors around the earlier than anticipated auto plant shutdowns overestimated the decline in June (-443K) and underestimated the decline in July (-247K). I am looking for a return to an NFP more in line with fundamentals and the indication is that this is closer to a -300K read.
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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