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US NFPs Expected to Fall by 540,000 - How Will It Impact the US Dollar?

Thursday, 05 February 2009 19:30:16 GMT  |  Terri Belkas, Currency Strategist

The US dollar will encounter one of its most market-moving pieces of data on Friday: non-farm payrolls (NFPs). The US dollar index has been consolidating below its January highs, and with job losses anticipated to have reached 540,000 in January, the news could determine whether or not the currency will reverse or break higher.

What is the Market Expecting for January Non-Farm Payrolls?

1.  The ADP private payrolls gauge reported its 12th straight drop in net payrolls, amounting to 522,000
2.  Initial jobless claims hit a fresh 26-year high, while continuing claims have steadily risen to all-time highs of 4.788 million.
3.  Challenger Job Cuts surged for the 11th consecutive month at a rate of 222.4% in January from a year ago.
4.  ISM Manufacturing employment gauge continued to hold near its 26-year lows.
5.  ISM Non-Manufacturing index shows employment conditions near worst levels since at least 1997.
6.  Conference Board’s consumer sentiment survey hit the lowest levels since recordkeeping began in 1967.

Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the thirteenth straight month in January. At the time of writing, Bloomberg News was calling for NFPs to plunge by 540,000, leaving 2009 to start as 2008 left off: negative. Looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 400,000 and 750,000, but based on leading indicators like Challenger job cuts and the ISM employment indices, we think there’s potential for payrolls to fall by 450,000 - 550,000 in January. Meanwhile, something that is starting to garner even more attention is the unemployment rate, which is projected to hit 7.5 percent, the highest since September 1992.

The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 7.2 percent in December 2008 while personal consumption has slowed from 1 percent in Q4 2007 down to -3.5 percent in Q4 2008.

How Will the US Dollar React?

In preparation for trading this top event risk, we need to put it into the context of speculation and consider the impact this employment gauge could have in altering expectations for growth in the US compared to its global counterparts. In gauging the market’s forecast for this event, there is little doubt that the official projection is already fully discounted. The more important factor, though, is that recent price action shows that fundamental US data does not tend to have a logical impact on the currency. Indeed, with risk trends in the driver’s seat, traders must consider the impact of NFPs on risk appetite. Indeed, if we see that NFPs fall more than expected and the unemployment rate climbs above 7.5 percent, the news could trigger losses in risky assets like stocks, trigger flight-to-safety, and thus, boost the US dollar against currencies like the euro. On the flip side, if job losses and the unemployment rate don’t climb quite as much as anticipated, the news could spark enough optimism to boost demand for stocks and forex carry trades, and subsequently lead the greenback lower.

Questions? Comments? E-mail: tbelkas@dailyfx.com

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