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Non-farm Payrolls Drives Big Gains for Currency Traders

Monday, 9 Jun 2008 | 11:24 AM ET

The EUR/USD and USD/CHF delivered big gains for all 3 of our leading currency traders. Like the stock market, sharp volatility ripped through the currency market on Friday on the heels of the non-farm payrolls report and the new record high in oil prices. All 3 of top traders took large positions before non-farm payrolls were released and given that they correctly anticipated the dollar bearish number, they were propelled to their leading positions. News moves the currency markets and that is exactly what we saw on Friday.

The contestant with the largest currency portfolio balance as of Friday’s close made all of his profits shorting USD/CHF minutes before the non-farm payrolls release. His portfolio value as of Friday afternoon was $216,638.71. Interestingly enough, although this person trades approximately 2 to 3 times a day, most of his profits are made on large single positions. Given the timing of this trade, it is clear that it was nothing more than a news play and given his accurate forecast of how non-farm payrolls could fare, he banked more than 170 pips on 1.8m lots in this trade. It is important to point out that Contestant number 1 did not exit the position immediately after the news release, instead he was patient enough to sit with the position until an hour before the markets closed on Friday, which allowed him to take advantage of further dollar selling throughout the course of day.

Non-farm payrolls is the number one most moving indicator for the US dollar and Friday’s price action in the currency market confirms the power that the report has on the greenback. The sheer disappointment of the report led to sharp dollar weakness against nearly all of the major currency pairs. However the cleanest reaction to the NFP release tends to be in the EUR/USD, USD/CHF and USD/JPY, which are the currency pairs of choice for our top 3 currency trades. Oil prices also hit a new record high on Friday while the Dow tumbled close to 400 points, adding additional pressure on the US dollar. Although non-farm payrolls has led to big gains for all 3 of the top leaders, given the market movingness of this report, traders have to be careful of taking large positions ahead of the release in live accounts because it is very

risky.

Meanwhile, the second and third leading contestants also went short dollars before the non-farm payrolls report. The only difference is that Contestant number 2, whose portfolio balance as of Friday’s close was $215,950.54 initiated his dollar bearish position two days before the NFP release while Contestant number 3 bought Euros and sold US dollars one day before the release. Therefore Contestant number 2 who also went long the EUR/USD banked gains on the hawkish comments from ECB President Trichet and the weaker NFP report. In line with his longer term style of trading compared to Contestant number 1, as of Friday’s close, he has yet to close the long EUR/USD positions that he initiated on Wednesday.

Contestant number 3 on the other hand who had a portfolio value of

$208,079.35 as of Friday’s close exited his long EUR/USD position minutes after non-farm payrolls were released. Taking a look at his trading record since the beginning of the currency portion of the contest, we see that he is consistently profitable. Of the 31 positions that he has initiated, only 4 have been losers, earning him an accuracy rate of 87 percent. It is also particularly interesting that he flips his positions quite often. Five minutes before buying Euros on Thursday evening, he closed his short EUR/USD position, which he had held from the prior afternoon. Before that, he was long Euros. In this case, being flexible and not committed to one direction is one of the major reasons why Contestant number 3 has been so profitable.

With a lot of US economic data on the calendar this week including retail sales and consumer prices, expect news to continue to be a big driver for the currency market.

Congratulations to our top traders and good luck!

Kathy Lien, Chief Strategist of DailyFX.com