Big Correction in Jobs? NFP Preview

After a very weak outcome for May, a significant rise in jobs is expected now, given some positive positive signs. This may boost the dollar, but the reaction can be quite different for different currencies. Here are the details and 5 possible outcomes for the greenback.

Published on Friday at 12:30 GMT.

A very disappointing outcome was seen last time: only 54K jobs were gained in a slowing US economy. This was slower than the pace seen earlier in the year. This figure could be revised to the upside.

The US economy hasn’t materially improved, but there are 4 good signs of stabilization:

1. Manufacturing is growing faster: The ISM Manufacturing PMI surprised with a nice jump, which means that this sector is on the move.
2. Services employment component on the rise: While the ISM Non-Manufacturing PMI disappointed and dropped, the employment component ticked higher. This is a good indicator.
3. ADP: The private sector report by ADP was excellent: 157K jobs were gained, much better than +67. Last month, the disappointment with ADP turned into a weak NFP. While they are not always correlated, this looks quite promising, given the previous month.
4. Stable jobless claims: The weekly unemployment claims haven’t returned to the better levels seen at the beginning of the year, but they have stabilized under 430K.

The stable unemployment claims mean that the unemployment rate will likely stay unchanged at 9.1%. A small move up or down will be ignored. Only a rise to 9.5% (or higher) or a drop to 8.7% (or lower) will be meaningful.

The “real unemployment rate”, U-6 will likely remain elevated at almost 16%.

So, the focus of the markets will be on the headline Non-Farm Payrolls number. Official expectations are around 85K, but with the recent data, a gain of up to 100K won’t be a big surprise.

Sentiment

• USD/JPY and USD/CHF are likely to react “normally” to the result – rise on a good one and drop if it’s bad.
• The Australian and New Zealand dollar are stronger, and will not fall too much on a good result.
• The euro and pound are more vulnerable, due the ongoing debt crisis.
• The Canadian dollar heavily depends on the employment data that will be released in Canada 90 minutes before the NFP.

5 Scenarios:

1. Within expectations: +80 to +110K: The dollar rises against the euro and the pound, and slides against the Aussie and kiwi.
2. Above expectations: +110K to 170K: The dollar gains against the euro, pound, Swiss franc and yen, and struggles with the Aussie and the kiwi.
3. Well above expectations: +170K or higher: In such an optimistic scenario, gains are likely across the board.
4. Below expectations: 0 to +80K: In this scenario, which can happen after last month’s disappointment, the dollar is likely to slide across the board.
5. Well below expectations: A job loss – such a scenario cannot be ruled out. If the US loses jobs, this has severe implications for all the world. Risk averse trading will be triggered, with the greenback losing to the yen and the franc, but rising against the rest.

In any case, this is one of the most volatile times in the forex market, and is not advised for everybody. Please read the 5 Notes For Non-Farm Payrolls trading. Remember that the initial reaction isn’t always the real one.

For more views on this event, see the FXStreet poll.