Citi On How To Trade Today's NFP Proxy

With the ECB doing largely as expected, and the EUR already seeing a modest episode of selling the news, the only major news out of Europe will be the scanning for "strong vigilance" keywords out of Trichet shortly, although it is almost certain that the central bank head will tone down further rate hike expectations dramatically, unless he wishes all those Option ARMs in Spain to push every Caja beyond the bring of insolvency. So going back to the US, with the ADP number the most important economic release next, here is Citi's Steven Englander on how to trade both possible outcomes of this datapoint.

ADP – what to buy on strength or weakness

The consensus is for 70k -- the central tendency of the distribution is 40k-110k with the fatter tails to the upside. The 70k is the lowest consensus expectation since October of last year. Citi does not have an official forecast but our economists' 100k NFP forecast is very close to the consensus view.

The pain trade on strength is clearly on the fixed income side -- with two year yields at 43bps they have more room to back up on strength than decline on weakness. Also the 70k forecast is about 120k below the average of the prior three months. If you translate this into GDP terms the market has marked down its annualized GDP growth expectations by a minimum of 1% over the last month, and by probably significantly more when you factor in associated negative productivity effects. Money markets have moved very much in the same direction. The pain trade still seems to be if the outcome is better than expected rather than worse.

With respect to USD we have seen the EUR weakening without much impact on AUD, CAD and other risk correlated currencies. Given this pattern, the safest buys on good news is long USDJPY, AUDJPY or CADJPY, or short EURUSD (and by implication short EURCAD as we highlighted yesterday).

It would take a big negative surprise to bring QE3 into the picture, but if the numbers really disappoint, short EURAUD may be the safest trade on the view that QE3 will be good for commodities, but further softening of growth prospects will not help EUR much.