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Forex Scalping: Trading the US Non-farm Payrolls News

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Christmas in Easter is almost here. The long-waited, much-talked about, controversial U.S. Non-farm Payrolls data comes out tomorrow at 8:30 AM Eastern time/ 12:30 GMT Time.

For weeks, this data release has been the focus of the markets and the financial media. The market have been long the number as investors have continued pouring into US equities. Investors are expecting the jobs data to likely throw us over 1,200 mark on the S&P 500 and over 11,000 on the Dow Jones.

There are a few factors at play tomorrow that make the situation slightly tricky. Here are the possibilities that I see happening as a reaction to the jobs number:

First, there is the possibility of a derivatives broker, which would put the talk of a “jobless recovery” back on the table. Markets have traded with the expectation that the number will be better-than-expected; so a negative number would definitely be a “shocker”.

US equities would likely react negatively following the news release. However, they would probably crawl back up (not necessarily Friday) because a bad jobs number would indicate that the Federal Reserve’s bunch bowl (low rates for an “extended period of time”) would not be eliminated any time soon. Overall, you could see substantial “buying on the dip” as investors close their eyes and look at the positive data (e.g. ISM Manufacturing, Retail Sales) to justify more buying.

In the currency markets, the reaction is less certain, except for the direction of the Yen. The Japanese currency would likely soar across the board on immediate risk-aversion after the release. Given the significant appreciation of all the major currencies against the yen, the movement to the downside would probably be violent.

The dollar reaction is the less certain reaction. As bond yield sink on the news, the direction of the dollar will depend on whether it takes the role of a safe haven currency or it reacts to interest rate differentials. If it takes the save haven role, the dollar will soar (except for the USD/JPY). Recent US dollar movement against the Euro has been fueled by the widening spread between German bunds and U.S. 10 Treasuries. Overall, the relative reaction in the different debt markets could play a role in the dollar direction if markets don’t go for the “safe haven” play.

I would recommend targeting the USD/JPY as the scalp pair of choice. It’s reaction will be very clear: bad news, go down.

Second, you have the slightly bad number. This is when things get hard.

For US equities, you would likely see an initial small dip; however, I would not count on it. Investors would likely disregard the number and focus on “the trend”. You know, the ” this number is not as good, but the next one will be”. There would probably be a perfect bear trap as bears get really aggressive and the bulls continue to buy equities by the boat load.

The currency market reaction here is really a coin toss. The number is not bad enough for a “save haven” flight, but it is not good enough to confirm quick tightening of interest rates. I would stick with the Yen crosses on this situation too.

Even slightly bad news will probably send the USD/JPY cross down. Bond markets are pricing in a good number, so once again, a slightly bad number would send yields down and create selling of all major currencies against the yen.

Third, you have the consensus number. We get that nice 187,000, plus or minus 10,0000 jobs. The market has already priced in these number, so you’re likely to see less volatility.

US equities will probably inch higher with the Dow Jones cracking 11,000 and the S&P 500 crossing the 1,200 mark.

In the currency market, you would see more Yen selling across the board. As for the dollar, you would probably see a slight rise on the dollar as U.S. 10 year Treasuries continue to sell-off. The safer bet once again is to go long the USD/JPY cross, followed by shorting the Yen against the Australian or Canadian dollar.

Lastly, you have the off-the-wall super good number.

In the realm of US equities, the response is likely a big spike. Good numbers, means economic recovery, means yay equities.

The catch, as in the first option, is how investors will think about the Federal Reserve’s attitude toward monetary policy. A really good number would start calling for Fed tightening, which would initially be bad for equities. Therefore, after the spike (again, not necessarily Friday), you could start to see some selling.

This is when it becomes easy to play the currency markets again. Yields would likely soar and the Yen would sell-off like crazy. Long the USD/JPY and any other Yen cross would be a big winner.

The dollar would also likely soar as economic recovery in the U.S. starts to really outperform the Eurozone. Additionally, the spread between German bunds and US Treasuries would likely widen.

Easy.

Alright, summing all of this up, we can tell that playing the USD/JPY pair tomorrow is the best option if you’re going to be setting up straddles. I don’t usually like scalping NFP numbers because they can be VERY volatile. You’ll see prices flashing up 50 pips and then down 50 pips, where you just end up losing a lot of money.

However, it seems like the number tomorrow will definitely fall on the positive side, which makes things better.

If the number is super good or really bad, it’s definitely going one way without much volatility. The problem is if the number is ambiguous (slightly bad being the worst scenario), where there would be traders scrambling and creating chaos in the price action.

Good Luck!