This Friday, we are expecting Non-farm payrolls for the month of October and now more than ever, the degree of payroll growth last month will determine whether the US dollar has hit a bottom. On Wednesday the Federal Reserve cut interest rates by 25bp in a move that some people believe will be their last. GDP growth in the third quarter was very impressive, the strongest in over a year and even though the weakening housing market is continuing to push consumer confidence lower, the recent stability in the labor market suggests that the US economy may avoid a material slowdown.
Despite layoff announcements across the financial and real estate sectors, we have not seen a major drop in monthly payrolls. With many banks having already made the bulk of their write offs, the worst of the credit crunch could be behind us. Therefore another month of payroll growth in excess of 100k should give dollar bulls the confidence to return especially given the Fed’s reluctance to lower interest rates further. At this time, the market is looking for a rise of 82k jobs and today’s price action in the dollar indicates that it is already attempting to bottom. Should job growth be anywhere near 125k, we expect a sharp dollar rally. If it remains below 90k however, speculation of a December rate cut will return. The market is still currently pricing in a slightly greater than 50 percent chance of 4.25 percent rates and it will not take much to drive those expectations even higher. Therefore the fate of the dollar hangs by a wire and that wire could very well be the October non-farm payrolls report (Also See How to Trade October NFP).
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[B]Unemployment Rate:[/B] 4.7% Forecast, 4.7% Previous
[B]Change in Manufacturing Payrolls[/B]: -15k Forecast, -18k Previous
[B]Average Hourly Earnings[/B]: 4.0% Forecast, 4.1% Previous
[B]Average Weekly Hours: [/B] 33.8 Forecast, 33.8 Previous
[B][/B]
[B]Arguments for Stronger Non-Farm Payrolls Growth
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[ul]
[li][B]ADP Employment Indicates Increase of 125K in Private Payrolls[/B] [/li][li][B]Challenger Reports a 12% Decrease in Layoffs from September, 8.8% From Year Prior[/B] [/li][li][B]Hudson[/B][B] Employment Index Climbed 3.7 Points to 100.8[/B] [/li][li][B]Monster.com Employment Index Rises 2 Points[/B] [/li][li][B]Help Wanted Ads Rise in September[/B] [/li][li][B]Employment Component of Manufacturing ISM at Highest Level Since April [/B] [/li][li][B]No Strikes in October[/B] [/ul] [B]Arguments for Weaker Non-Farm Payrolls Growth[/B][/li] [B][/B]
· [B]4 Week Average of Jobless Claims Rise to 327k, the Highest Since April[/B]
As you can see, payrolls can go either way, but with layoffs at the lowest since 1999, newspaper and online job ads rising and private sector payrolls firm, the odds are certainly skewed in favor of a strong release. The currency market is already banking on that with the US dollar up across the board. However, traders need to be careful since jobless claims rose to the highest level since April and consumer confidence fell for the fourth month in a row. If the labor market is really recovering, confidence would not be the weakest in 2 years. There are still a lot skeptics out there who do not believe that the US economy has already seem its worst and it all boils down to what non-farm payrolls mean for interest rates. If there is a reason for traders to believe that the Fed will continue to lower interest rates, then the current recovery in the US dollar will turn on a dime. Nothing is certain until we see payrolls and even then we need to watch how the market reacts to it.
By Kathy Lien, Chief Strategist of DailyFX.com