Dollar Hollar: Non Farm Payrolls, USD Bull Bear Playbook

In this weeks update I want to take a closer look at how this weeks Non Farm Payrolls release is likely to impact the Dollar trade. Last weeks FOMC statement re ignited hawkish expectations of a 2015 rate lift off from the FOMC. While the Fed kept rates on hold at its recent FOMC meeting, the accompanying statement was interpreted as slightly more hawkish than the market had positioned for.

Fundamental Flows

While there is no certainty that Fed will hike in the Dec meeting (as Fed remains data-dependent), hopes are definitely rebuilding post-FOMC. Implied probability of Fed move in Dec (implied from Fed Fund futures) has now risen above 50%, from 33% before the FOMC meeting. Yesterday FED Chair Yellen underpinned the more hawkish stance of the committee by restating her commitment to a 2015 move premised on continued supportive data. Obviously tomorrows Non Farm payroll release will be pivotal to the committees view, so lets stake a look at how the data could play out.

The current trends in US data would suggest that there is a strong potential for the payrolls data to underwhelm once again. The employment constituents of manufacturing and business sentiment surveys suggest October was likely another slow month a job growth. ISM manufacturing index and Chicago PMI data both disappointed in October, while regional FED surveys all delivering less than stellar figures through October on balance demonstrating a contraction in manufacturing activity, with the majority of businesses surveys reporting a reduction in employment growth with very few suggesting expansion plans for the period.

A further contributor to the deflated employment sentiment in October was the NABE’s business condition survey which detailed that a rise in respondents of the view that employment would fall as opposed to rise over the period. The one glimmer of hope in Octobers sentiment reports was to be found in the non manufacturing sector of the economy where the employment aspect of the index showed a strengthening in employment trends rising from 58.3 to 59.2. This minor green shoot was somewhat over-mimed by a rise in those reporting job plentiful as opposed to  jobs ‘hard to get’ returning to a negative reading, this was corroborated by the University of Michigan consumer sentiment survey, which highlighted an uptick in those reporting jobs lost as opposed to employment gained during the period.

The core counter balance to the bearish perspective comes from the continuing claims data which continues to print historic lows, with both initial and continuing claims registering 42 year lows during the period, the challenge with the read through of this data is assessing the amount of the workforce that have simply dropped out and as such are not addressed as an input to the data. Hence this data really only represents those who have just been made unemployed as opposed to recognizing those experiencing long term unemployment.

With the contributing data sources to this months number painting a high probability of another weak number, I want to highlight our readers attention to some interesting historical studies highlighted by a tier one investment bank in advance of tomorrows release, detailing some interesting statistical and historical trends in the NFP data for October

nfp12015-11-05 10_40_32-Citi NFP what does history say.pdf2015-11-05 10_40_56-Citi NFP what does history say.pdf

So now we have a broad perspective of the sentiment data versus statistical and historical trends, lets jump into the charts and see how this reads through to the technical picture and potential trade locations for the USD Index.

Trading Take Away

The USD Index continues to test the resistance level highlighted in last weeks update. The shallow reaction that we witnessed on the initial test suggests that technically the market remains bullishly orientated toward the USD.  Tomorrows data offers a relatively asymmetric outcome to the resistance level we are trading at, another weak report tomorrow with no prior upward revisions will likely see the level hold and a deeper correction to develop. While upward revisions to last months report and a more robust number this month will likely see the current resistance level fail and the USD extend gains to test the secondary resistance level highlighted in the charts below.

The two charts below show the probable bearish and bullish price patterns I am tracking and the trade locations of interest.

  • The bearish view would see the current equality AB=CD pattern that has completed into the descending trend line and horizontal resistance 98.00/98.500 stall the current advance and a correction back to initially test the apex of the range or the ascending trend line support just below

2015-11-05 11_47_27-

  • The bullish view would see the current upswing extend through the primary resistance level highlighted on the chart expand towards and test the year to date highs, I would anticipate some supply here on the first test but expect the pull back to be shallow and hold the prior descending trend line resistance as support before a trend continuation move develops as per the chart below.

2015-11-05 11_53_31-

Always I will be playing intraday reversal patterns at my highlighted levels and if you want to track updates for these trades be sure to follow my trading updates on twitter @LFXPatrick