Summary Outlook: On Friday, July 2, the US will report a +110 increase in private sector payrolls (prior +41K) and an increase in the unemployment rate from 9.7% to 9.8%, according to consensus forecasts. Due to US Census layoffs, the change in non-farm payrolls (NFP) is expected to register -125K (prior +431K), but the market focus will likely stay on the private payrolls number as the best indicator of labor market developments. Given the spate of weak data globally in advance of the jobs report, and in anticipation of anemic job creation in June, markets have spent the week pricing-in a bad result. As such, we think the risks are now biased to a 'risk positive' reaction if the private payroll number is close to expectations (e.g. +70/+120), and lean toward a more pronounced rebound in risk assets (stocks, commodities, JPY-crosses) if private payrolls exceed forecasts (e.g. >+120K). Only a private payroll number close to or below the May number is likely to see risky assets continue to decline. This is essentially a 'sell the rumor/buy the fact' outlook and is contrarian to the current market bearishness. As always, the revisions to the May report will be important, and we would factor them in directly for a net number to interpret the June data. (For example, if May private payrolls are revised +30K and the June number is +96K, we would interpret that as an addition of +126K for June, which would be above expectations and potentially risk positive.) The change to the unemployment rate is unlikely to have a significant impact as markets do not anticipate any meaningful improvement/deterioration in the months ahead.
Trading Strategy: Thursday's trading saw a massive short-squeeze in EUR/USD and all EUR-crosses, and the risk is for additional short-covering given the size of short-EUR positioning. If markets respond in a 'risk positive' fashion to the US jobs report, EUR would also likely still be biased higher. We remain bearish on EUR/USD overall and think we have come to attractive selling levels near 1.2500, but we're reluctant to commit in the current positioning-driven volatility. Instead, and In light of our expectations for an overall risk positive reaction, our preference will be to concentrate on buying AUD/JPY and CAD/JPY as risk trades on remaining weakness in the 72.50/73.50 and 81.50/82.50 areas, respectively; stops 50-70 points. A more conservative approach would be to note the pre-release level of those pairs, and if they decline in response to the data, but subsequently bounce and regain pre-data levels, longs could then be established with more confidence. If the private jobs number is below +50K, we would abandon those strategies. USD/JPY will set the tone for the JPY-crosses and we would look for an at/above forecast result to see USD/JPY move directly higher, while a reading below +50K would cause a quick drop. We would also note a long holiday weekend in North America and would expect trading activity to diminish sharply following the European close. As such, we would be active profit-takers/protective stop loss managers on any gains in JPY-crosses following the jobs data.
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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