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USD

Get ready for payrolls - it could be big

Chris Weston
Chris Weston
Head of Research
May 6, 2021
We steamroll into US non-farm payrolls (NFP) at 22:30 AEST, with the consensus now calling for 1m jobs and the distribution of estimates ranging from 2.1m to 700k net jobs created.

With the unemployment rate eyed to tick down 20bp to 5.8%, we know the Fed will be looking at the U6 unemployment rate, but we’re traders not economists and what’s more important is what the algo’s react to and that is likely the headline NFP number. I’ll push out the implied volatility matrix later in the day on Telegram, as I suspect overnight implied vol in G10 pairs will ramp up into payrolls and its good to see the extent of the expected move to help manage risk more effectively.

I guess with everyone talking about such hot payrolls numbers and bond traders likely positioned for a print between 1m – 1.3m, we need to ask what happens if a low print is seen – say below 500m jobs. That would be a surprise and the pain trade given positioning. I would expect real Treasury yields to push lower on this outcome, which would support Gold and short USDJPY would be one of the cleanest plays on a poor number. I'm not advocating trading the news, however, as I sit in the camp that we will get a hot number.

On a side note, for clients on our zero commission Standard Account, we’ve cut spreads substantially on the FX majors – take a look at the new rates here as they stack up well vs the street

Perhaps take a backtest on the new spreads and see how the equity curve changes. This piece on why liquidity is so important for traders may be of interest too.

For now, the market is happy to sell USDs into the NFP release with the DXY having firmly rejected 91.30, with EURUSD finding buyers off 1.1990 – Gold has worked well to the upside, which is somewhat surprising given US real Treasury yields are higher, but the USD weakness is the tailwind here and the yellow metal sits at the best levels since mid-February and gravitates towards my 1840 target. Although, I think 1830/35 may cap moves on the upside short-term – let’s see payrolls though, as a hot number will not be taken well for Gold longs.

07_05_2021_D1.png

(Source: Tradingview)

The commodity space is the talk though and Iron ore specifically is getting a solid review, with futures +4.4% and making new highs – Spot Iron ore sits north of $200. Copper closed +1.7% and both provide major tailwinds to the AUD, which has its sights on 0.7800 – I guess it's hard to wade into AUD longs with conviction, with the RBA’s SoMP and NFPs due today (11:30 AEST), while the market is still trying to understand the prospects of tapering at the July RBA meeting.

The better buying (vs the USD) on the day has been in the CAD and ZAR, with AUDCAD making a new low in this run from 0.9758, while USDCAD sits 1.2150 and the lowest levels since Sept 2017. Everyone is on the CAD train it seems and with the market looking for two hikes from the BoC in 2022 it's not hard to see why – the CAD is overbought, but rightly so.

Also, how’s this for a run. Lumber has gained 0.6% - closing higher on 34 of the past 36 trading sessions.

GBPUSD has been well traded, with big vol into and after the BoE meeting, although the net change on the session was minimal. We saw confirmation of a technical adjustment in the pace of bond purchases to £3.44b/wk from £4.44b/wk and while this is a taper in the pace, we should remember that the BoE had a set allocation (or ‘envelope’) of £150b of bonds they could purchase this year and at the prior pace meant they exhaust it too soon.

Some consideration on Andy Haldane’s view is that the stock of purchase should be taken down to £825b (from £895b), which is a clear hawkish dissent and perhaps one that supports the quid but looking at the daily of cable and there's consolidation – and one where neither the bulls nor bears are making a move. This usually means volatility ahead, although GBPUSD 1-month implied volatility is 6.93% - not far off a 52-week low. One to watch.

In equity land, the S&P 500 closed +0.8%, with financials the bull play into payrolls. US banks are working well and remain the trend and momo play. Although, down under CBA is flying at the moment and eyes a test of $100, which would take the bank above all analysts 12-month target. Tech has worked with the NAS100 +0.8%. For the single stock traders, play of the day goes into Tesla, with the LT trend being tested for the sixth time since mid-2020 - a break here would get some airtime. For those who want to trade US shares, take a look here.

07_05_2021_D2.png

(Source: Tradingview)

All eyes are on Musk’s appearance on SNL and not to see if he can entertain but the pump is real – buy the pump, sell the fact and that applies to Doge and the Crypto scene. it could be a big weekend for our crypto traders.

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