The US dollar surged on Thursday as risk aversion triggered flight-to-quality and sharp declines in US stocks for the second day in a row. However, on Friday morning, US non-farm payrolls are anticipated to fall by a whopping 200,000 or more for the first time since March 2003 while the unemployment rate is forecasted to reach a fresh 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 -300k and the most optimistic forecast at -85k. However, this is the first time in quite a while that non-farm payrolls (NFPs) are anticipated to fall by 200k or more. In fact, the last time expectations were so bad was in October 2001 when the figure actually fell by a whopping 325k in the aftermath of September 11th. What are the realistic odds that NFPs will fall in line with, if not more than, expectations?
Arguments for Weaker Non-Farm Payrolls
1. Jobless Claims 4-Week Moving Average Remains Near Highest Levels Since At Least 2002 2. Continuing Claims Rise to the Most Since 1983 3. ISM Non-Manufacturing Employment Component Falls to Lowest on Record Going Back to 1997 4. ISM Manufacturing Employment Index Dives to Lowest Since 1991 5. Challenger Job Cuts Rise For 8th Consecutive Month 6. ADP Employment Change Falls By the Most Since November 2002 7. Consumer Confidence Plunges to Record Low Going Back to 1967 8. Work Stoppages Rocket Up to 27,000 Amidst Strikes 9. Monster.com Employment Index Falls 10 Points in October, Down 20% Year-on-Year 10. Help-Wanted Online Index Goes Virtually Unchanged Following Sharp Declines in September
Just by glancing at the list above, it is rather obvious that the odds are stacked in favor of a disappointing NFP release on Friday. Indeed, every single leading indicator for US employment that we follow suggests that October was a month of heavy job losses, as the number of continuing jobless claims jumped to 3843K in the week ending October 25, the highest reading since 1983. Likewise, the employment components of both ISM Manufacturing and ISM Non-Manufacturing (services sector) plummeted, while the Conference Board’s consumer confidence survey showed that sentiment fell to the worst levels on record going back to 1967.
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? Risk trends are driving price action in the currency markets, with risk aversion benefiting low-yielding currencies like the US dollar and Japanese yen while hurting higher-yielding currencies like the Australian dollar and New Zealand dollar.
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 ET 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. My bias? A weak NFP reading at -200K or lower has the potential to actually send the “safe-haven” US dollar higher, as significant declines in the US stock markets would trigger flight-to-quality. Traders should also watch the unemployment rate, as anything above 6.3 percent (the consensus forecast) will mark the highest levels since the early 1990’s.
Written by Terri Belkas, Currency Strategist of DailyFX.com
Questions? Comments? E-mail: tbelkas@dailyfx.com