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About GAIN: News & Events |
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RESEARCH NOTE: US March NFP Report
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: US March employment data will be released on Friday April 3 at 0830ET/1230GMT. The consensus forecast is for -660K NFP change (prior -651K) and a rise in the unemployment rate from 8.1% to 8.5%. We expect to see a worse than expected -710K change in NFP and a smaller increase in the unemployment rate to 8.4% (more below). Negative revisions to prior period data may result in total NFP losses reported in March approaching 1 mio.
The market is clearly braced for a weak US jobs report, but a rally in risk appetites is currently underway, though we note it is on little substantive fundamental improvement and primarily sentiment-based. As a result, the USD broke lower on Thursday and JPY-crosses rallied sharply. As often happens with NFP releases, a market breakout will either be confirmed or denied in the post-NFP reaction.
We think a NFP drop of more than -750K and/or an increase in the unemployment rate to above 8.5% will be needed to rattle investor confidence and trigger profit-taking as risk aversion returns. An 'as expected' or 'better than expected' result is likely to be ignored, and may even be construed as the start of a plateau in layoffs, fueling further gains in sentiment and risk appetites. As always, revisions to prior months' data will be an important wild card.
Trading Strategy: The USD is currently under pressure as risk appetites improve, and the JPY-crosses are similarly well-supported. A significantly weak NFP report may derail the current rally in risky assets and see the USD recover lost ground. But it is difficult to argue that dismal US employment data represents a reason to buy USD, so the deck is clearly stacked against the USD. We would expect USD/JPY to take the biggest hit if the NFP surprises significantly to the downside (worse than -750K), while other USD pairs (e.g. EUR/USD, AUD/USD) will weaken slightly/gain less, as JPY-crosses are sold on a return to risk aversion. An as expected (-650K to -720K) or better than expected number (less than -650K) is likely to see the current risk rally extend gains further. In this case, we would expect to see USD/JPY fall less initially and likely recover quicker, and for other USD pairs to extend gains, as JPY-crosses move higher as risk sentiment holds steady and possibly improves. Overall, we will look at the NFP data for what it implies for risk appetites, closely watching how stock markets react, and trade the USD and JPY-crosses accordingly.
Data Analysis: The data we have in hand once again point to a weaker than consensus NFP result for March. Our in-house model is flashing a -710K decline on the heels of a -651K result the prior month and this is well below the market forecast of -660K. Initial jobless claims continued to push into fresh cycle highs on the month and were running at 657K from a prior 637K. The number of continuing claims is even more staggering, jumping to 5.7M from 5.3M. Private payrolls look poised to bear the brunt of the decline once again and the ADP employment report showed a massive -742K jobs shed in March, on top of the dismal -706K February number. One bright spot on the employment front came with the ISM manufacturing report as the employment subcomponent ticked up to 28.1 from 26.1 prior - though this is a small consolation. For the unemployment rate, we are estimating a less aggressive increase to 8.4% from 8.1% while the market is expecting an 8.5% print. Along with the elevated claims, the Conference Board's labor differential (jobs plentiful minus jobs hard to get) ground lower once again to -44.1 from -42.3 prior. The deterioration was less pronounced than in February, however, and as such we believe the uptick in the unemployment rate will also be more muted. We still look for the jobless rate to hit 9.2-9.5% before the end of 2009.
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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