Trade Team Update – – 7/31/08 (Non Farm Payrolls)

August 1, 2008 at 4:15 am Leave a comment

By FX Insights

Trade Team Update – – 7/31/08

I don’t know about you, but trading the market this week has pretty much fried my brain and we still have NFP to contend with… don’t expect any sanity in the markets tomorrow because all markets react and respond to NFP. 

Today’s big event was the release of the GDP data. As we forecasted last night, the GDP data printed USD+, but printed below the market’s expectations. As you well know, the euro ran up and then fell down. 

Why did this happen? Very simple… the initial reaction was against the dollar because the expectations were running so hot that a growth rate of 1.9% looked pretty bad… perception is reality in this game… so, the market took the euro up, it hit my key upside level of 1.5698 to the pip and proceeded to make a dramatic drop. 

Some traders said the euro hit 1.5700 on the bid, which would also mean my target of 1.5700 was hit, but my broker FXCM only showed a high of 1.5698 on the bid, so I suppose I can’t say my target was officially hit because I use FXCM’s price feed to calculate my numbers and for my price action, but on my MIG account I did see a high of 1.5700. Whatever… 

Why did we drop? Because, the reality is, a 1.9% print is a great number for the U.S. economy. It’s the highest level of growth the economy has seen all year. And that’s why we dropped. It also helped that gold and oil dropped from their highs as the euro was dropping. 

Another factor that initially drove the euro up this morning was the absolutely absymal print on the Initial Claims data. I believe this was the worst print all year long and serves as a very good reminder that the U.S. job market is remains under intense pressure and is struggling to show any signs of life. 

NFP:

I’m really not looking forward to tomorrow’s NFP. Usually I live for NFP’s but tomorrow’s event is concerning me. If I’m concerned that means you should not trade NFP!

What’s concerning me the most is the utter lack of liquidty that will be in the market tomorrow. Tomorrow’s NFP will be the most ill-liquid we’ve seen all year and this makes for serious complications when it comes to forecasting and then actually trading it in the real-time. You saw what the market did today… in less than an hour we made a 100+ pip roundtrip… 

Trying to forecast is almost pointless for tomorrow. Reason being, no matter how the data prints, there’s no guarantee of a logical move that correlates with the data.

My personal forecast is that we see a print showing a net loss of 28K jobs or higher. Based on what research I have done, which isn’t nearly as much as I normally do, my numbers show a minimum net loss of 28K jobs with a potential net loss of over 50K jobs. 

Now, this doesn’t mean I’m loading the boat with euro longs because we still have last month’s revision to contend withand the Unemployment Rate which carries almost as much weight as the NFP data. Current forecasts are showing a tick up in the Unemployment Rate. 

I have no personal forecast on this piece of data because whenever I forecast a tick up, it ticks down, and then when I forecast a tick down, it ticks up, so I’m not even messing with that one this go round. 

So instead of trying to crystal ball tomorrow’s data and the market’s reaction, lets rather look at the potentials that exist either way… 

A print that comes in at expected shouldn’t do any real harm to the dollar. Market sentiment is looking for any reason to support the dollar right now, so even if the data prints at the expected net loss, which in reality is terribly USD-, we very well may not see the dollar get creamed. An initial spike up is certainly possible, but it may not get too far…

A print that comes in below expected and a print showing weakness on the Unemployment Rate should easily send the euro up 80 or more pips. I am not forecasting a 200 pip type move on below expected NFP data. Europe’s not really doing any better and the market’s back in love with the dollar, so I don’t see us getting a one-way ticket to the moon. 

A print that’s better than expected should likely hammer the euro. The crazy thing is, even if the data prints better than expected, a net loss of jobs is still a net loss of jobs and this is a terrible thing. But, the markets don’t look at it in that kind of logical way. A better than forecasted should send the euro down to test the 1.5500 level and depending upon what happens there, we could see further downside testing. 

Those are the basic scenarios I’m looking at and preparing for. But, no matter what happens with tomorrow’s NFP, it’ll still make the ADP data look worthless. 

I cannot urge strong enough caution against trading NFP tomorrow. The market’s forecasts and expecations are all over the place. The banks are forecasting totally different number than what the market economists are forecasting. That conflict alone, in addition to the utter lack of liquidty is setting the market up for some serious shenanigans tomorrow. 

In case I didn’t make myself clear: DON’T BE AN IDIOT AND TRADE NFP — DO NOT TRADE NFP!

My personal opinion is that we move up on NFP but I don’t even trust this overall bias enough to load up on some euro longs down here. In the name of risk management, my trading rules will not allow me to take any trades prior to the event like I normally do. That might sound lame, but I’m not out to impress anybody tomorrow… 

EUR/USD:

A lot is riding on tomorrow’s events. As I said, an upside surprise will only further serve to support the dollar and serve to cap the gains the euro has been attempting to make all week long. 

The fundamentals have kept the euro down this week… early in the week price action patterns were ripe for a move to 1.5800 but strong USD fundamentals reversed this and wiped it off the table. 

The euro’s final shot this week will come tomorrow… as I said, my personal forecast is a move up but it’s all riding on how the data prints, and more importantly, how the market responds to the data and what the liquidity situation is to support such a move. 

No matter what, any rise we get I’m shorting it. I’d like to hold off on any new short until we get above 1.5700, but it may be a game time decision tomorrow on how I decide to react and respond. 

I’m still strongly bearish on the euro and short any rise and will be happy to hold those shorts should they go into drawdown. Fundamental factors will determine how much higher the euro can possibly go. 

It’s very important to note two events that are happening next week: both the Fed and ECB give their rate decisions. The Fed is first, the ECB is second. Just something to keep in mind as you think about the possibilities tomorrow’s NFP hold. 

Im out of things to talk about at this point… too many thoughts in my mind and I need some time to sort them out… it will help to see the real-time price action once Frankfurt and London opens. I will post more updates and key levels later on this evening. Stay tuned… 

Please be smart and sit on the sidelines tomorrow. There’s too much risk tomorrow. It’s not worth it. 

-FX Insights

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Margin/Risk Management/Keeping Profits Understanding Drawdown/Market Drops Part I

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