US December Employment Report and Fed's Bernanke Testimony

Expected Release Date: January 6 0700EDT/1100GMT
Summary Outlook

Friday, January 7 is shaping up to be an eventful day. At 0830ET/1330GMT the US will report December employment data, which has taken on epic proportions following Wednesday's surge in the ADP private employment report to +297K (exp. +100K), followed at 0930ET/1430GMT by Fed Chair Bernanke's testimony to the Senate Budget Committee. We expect the change in NFP to disappoint consensus expectations of +150K and come in around +100K, and for the unemployment rate to fall to 9.7%, in line with market expectations. We look for Bernanke to acknowledge some improvement in the economic outlook, but to steadfastly defend and commit to continue the Fed's asset purchase program. If data and events meet our expectations, we would look for recent USD strength to see a potentially sharp reversal to the downside. Below we discuss in more detail the reasoning behind our view and alternative scenarios, along with our trading strategy.

US Jobs Report
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The eye-popping jump in jobs seen in the ADP report has shifted market expectations to a much higher NFP reading, even though the ADP report has been a poor predictor of concurrent changes in NFP. While the consensus forecast for NFP has been raised somewhat to +150K, we think market pricing (USD strength) reflects an even higher outcome, most likely above +200K. There are many reasons to doubt the accuracy of the ADP report, as no other measure of employment has suggested such a surge in job creation. Indeed, the employment index in the Dec. ISM service sector gauge, released just hours after the ADP, actually fell to 50.5 from 52.7, while fully 270K of the ADP's 297K gain was attributed to the service sector. The 4-week average of initial jobless claims continues to run above 400K, a level which is consistent with job creation of around +100K/month, hence our lower estimate.

Fed's Bernanke Testimony
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Fed Chair Ben Bernanke will testify before the Senate Budget Committee on monetary and fiscal policy and the US economic outlook. His prepared text will be released at 0930ET/1430GMT. Recent US data has unambiguously improved and the additional stimulus package enacted in Dec. should only serve to heighten optimism. However, the minutes from the Dec. 14 FOMC meeting indicated that many at the Fed have a higher threshold for improvement before they would consider curtailing or suspending their asset purchase program. With the unemployment rate still nearly 10% and core inflation arguably still falling, we fully expect Bernanke to reinforce that view and make clear his commitment to completing the full amount of Treasury purchases on schedule. He may even indicate that additional asset purchases are still on the table, given the recent increase in US rates. Ultimately, he is speaking to markets and the message he want to get across is that he wants rates lower and that the Fed will not hike this year. We will be watching the response of US Treasury yields closely, and the more dovish Bernanke is, the more we expect yields to fall, potentially creating additional headwinds for further USD gains.

Trading Strategy
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Given the shift in NFP expectations and prices, we think a number above +200K will be needed just to sustain USD gains, while a reading below is likely to see the USD weaken. A reading below the consensus estimate of +150 is likely to see a larger USD sell-off, and a print below +100K could potentially get very nasty for the greenback. We think the USD has the most to lose against all but the EUR, which remains saddled with sovereign debt concerns. Alternatively, a NFP gain of +200K or more would validate recent USD gains, but further upside may be limited given the extent to which such a reading has already been priced in. Keep in mind, it's just one month's data and even if 300K jobs were added every month for the rest of the year, the unemployment rate would still be around 9% at year-end. As always, we will be watching the pre-release price levels, and if the initial price reaction reverses through it, we would interpret that as a reversal and position accordingly. Bernanke's testimony may be just such a catalyst for an intra-day reversal.

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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.

Источник: FOREX.com

07.01.2011