Relative strength strategy for trading the Non-Farm Payrolls

Non-Farm Payrolls or NFP is approximately 8 hours away. Normally, I advise against trading this news event. However, the fundamental setups are, I believe, sufficient to favorable in getting a trade in with the appropriate risks.

This strategy involves shorting both the EURUSD and USDCAD pairs in order to simultaneously buy and sell the U.S. Dollar. With the pre-NFP conditions, it makes sense to capitalize on this opportunity.

Before I jump right into the analysis, here is a summary of the key events that played a factor in this decision:

  1. U.S. initial jobless claims fell to 249,000; dropping to the lowest point since 1973
  2. Canada value of building permits rose to CAD 7.3B; highest in the last five months
  3. ECB reiterated willingness to continue with QE until at least March 2017

First off, we establish the bearish stance on the Euro. The ECB’s actions should be taken with a grain of salt, but further devaluation should not come as a surprise. At 8:30 am New York time, both Canadian and American unemployment figures are released at the same time. Depending on the relative strength of the two plus the Euro, losses can be kept to a minimal while having the opportunity of capturing a decent sized profit despite the volatility.

The idea is that a strong news release of a stronger currency (USD) will generate a bigger move against a weaker currency (EUR) than another semi-strong currency (CAD).

There are a few scenarios at play.

Scenario 1: Strong U.S. and Canadian employment figures

EURUSD short would pay off big time as a strong currency (USD) against a bearish currency (EUR) will generate a much bigger move. USDCAD would remain relatively flat to produce an overall profit.

Scenario 2: Strong U.S. and weak Canadian employment figures

EURUSD short would pay off big time, but our USDCAD long would be a major loser. The magnitude of the two movements will generate a break-even to a slight lost if we adopt a pessimistic point of view.

Scenario 3: Weak U.S. and strong Canadian employment figures

EURUSD short would not play very well. Weak USD and EUR would be netted out to a slight loss adopting a pessimistic view. Meanwhile, our USDCAD short would tank as a strong Canadian Dollar and weaker U.S. Dollar would send this pair lower producing an overall profit.

Scenario 4: Weak U.S. and Canadian employment figures

As we established in scenario 3, EURUSD would break-even to producing a slight loss pairing two weak currencies together. Meanwhile, the same is to be expected for USDCAD producing a milder loss to break-even.

This strategy is by no means perfect and this will just be one of the many trades we will be monitoring to see if it does pan out.

Currently, I have shorted EURUSD and USDCAD an will be holding until after the Non-Farm Payrolls. Stay tuned for a later update!


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