The US dollar has surged across the majors over the past week on hopes that the Treasury’s bailout bill will finally pass the House vote, and on signs of a deepening economic slowdown in regions like the UK and Euro-zone. However, on Friday morning, US non-farm payrolls are anticipated to fall by more than 100,000 for the first time since 2003. How will this impact the US dollar?
Looking at the stats of what the 76 economists polled by Bloomberg News had to say, the range is very wide with the most pessimistic forecast at -175k and the most optimistic forecast at -13k. However, this is the first time in quite a while that non-farm payrolls (NFPs) have the potential to fall by more than 100k. In fact, the last time we had such a result was in March 2003 when the figure fell by a whopping 212k. What are the realistic odds that NFPs will fall in line with, if not more than, expectations?
Arguments for Stronger Non-Farm Payrolls 1. ADP Employment Change Falls Less Than Expected 2. Consumer Confidence Unexpectedly Improves for 3rd Consecutive Month 3. Work Stoppages Fell to Zero as Strikes Ended 4. Monster.com Employment Index Climbs 1 Point
Arguments for Weaker Non-Farm Payrolls 1. Jobless Claims 4-Week Moving Average Hits Highest Level Since At Least 2002 2. Continuing Claims Rise to the Most Since August 2003 3. ISM Manufacturing Employment Component Falls To Match the April 2003 Low 4. Challenger Job Cuts Rise For 7th Consecutive Month 5. Help-Wanted Online Index Drops 216,000, Continuing a Downward Trend Started in May 2007
Will September Non-Farm Payrolls be Better or Worse than August?
The majority of the leading indicators for non-farm payrolls indicate that September was a month of heavy job losses, and even the figures that could technically argue in favor of a stronger reading aren’t incredibly convincing. Indeed, looking at the “positive” data, the ADP employment change fell less than expected by 8k, but still showed job losses for the second month in a row. Likewise, the Monster.com employment index rose by 1 point but annual growth remained flat for the third consecutive month, signaling stagnant conditions.
Meanwhile, the surprisingly strong consumer confidence numbers for September may not be completely representative of sentiment for the month, as the survey’s cutoff date was on September 23rd, so it may not accurately reflect consumers’ responses to the credit crisis and the turmoil surrounding the Treasury’s bailout bill. Combining these “positive” factors with the truly negative factors, there is a very real possibility that NFPs will fall by more than 100k on Friday morning. Trading the Non-Farm Payrolls Release This Friday
The release of US NFPs can be very exciting and market-moving for the US dollar. However, we’ve been seeing lately that the reaction of the greenback does not always seem logical, as a weak NFP reading will sometimes be followed by US dollar strength (and vice versa). In fact, US economic data has generally been absolutely abysmal lately, fed fund futures are fully pricing in a rate cut on October 29, and yet the greenback has still strengthened quite a bit versus most of the majors. Why? Signs of recession are popping up all over the place. In the Euro-zone, UK, Japan, Australia, and New Zealand, economic indicators have been extremely disappointing, and with the US recession likely priced in already, there is room for currencies like the euro and British pound to fall lower. (Check out our latest report on forex positioning to see why this move could continue).
As a result, the release of NFPs on Friday shouldn’t necessarily be used as a trigger for making a trade. Instead, traders should either avoid trading at the time of the announcement (8:30 EDT on Friday) due to the potential surge in USD volatility, or if trading on a longer-term time frame, simply keep that factor in mind and use wider stops. Written by Terri Belkas, Currency Strategist of DailyFX.com Questions? Comments? E-mail: tbelkas@dailyfx.com