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The month of October probably saw more gains in jobs, perhaps even better than in the previous month. There are many signs pointing to a strong gain in jobs. The unemployment rate and the “real unemployment rate” are not expected to move.

This is likely to weaken the dollar against risk currencies. Here is what is expecting us in the monthly circus with 5 scenarios for the dollar. NFP Preivew.

Background

Economic indicators have mostly improved during October: the Philly Fed Index was the biggest mover, turning from positive to negative. The main manufacturing indicator, ISM Manufacturing PMI, dropped, but the employment component remained mostly unchanged and in growth territory, providing optimism.

The vast majority of the economy is in services. Also here, the index slid by 0.1 to 52.9 points, but the employment component jumped from 48.7 points to 53.3 points. This is a big jump and a change from contraction to growth.

Also the ADP report for the private sector was good, showing a gain of 110K. While this report should be taken with a grain of salt, the overall trend is eventually seen also in the private sector section in the official Non-Farm Payrolls.

Yet again, the government’s share in jobs is expected to be negative, but this will likely be much lower than the growth in the private sector.

Expectations

Official expectations stand on a gain of around 100K. Given the jump in the employment component in the services sector, a gain of 150K will not be a big surprise.

The unemployment rate will likely remain unchanged at  9.1% or might drop to 9%. The weekly jobless claims have remained quite stable. The really depressing figure is U-6, or the “real unemployment rate”, which rose to 16.5% last month. This includes people too desperate to seek a job. The unemployment rate will likely have a small impact.

Expected market reaction

The markets are obsessed with the Greek drama (or tragedy). Every small headline in the debt struck country has a huge impact on currencies, even if it is part of an internal game. All in all, the “risk factor” is still dominant in the markets.

This means that negative US figures strengthen the dollar against almost all currencies (the yen is the exception) on risk averse trade, while positive US figures weaken the dollar on a risk rally.

The way out of this pattern is a really huge relief – a figure so good that it make the Federal Reserve begin thinking of tightening, or at least scrap plans of more loose monetary policy.

So here are the general scenarios:

  1. +70K to 130K: The markets shake and quickly refocus on Greece. High probability.
  2. +130K to 200K: The dollar weakens on a relief rally. High probability.
  3. Above +200K: The dollar rallies on strong optimism. Low probability.
  4. 0 to +70K: The dollar strengthens on risk aversion. Medium probability.
  5. A loss of jobs: The dollar gains a lot of ground as fear takes over. Low probability.

As always, it’s important to remember that this is a unique event that triggers high volatility. Please read the 5  Notes for Trading the Non-Farm Payrolls

Further reading:

 

The figure is published on Friday, November 4th at 12:30 GMT. This happens to be the 3rd anniversary to the election of Barack Obama as the president o the USA. Will he get a present?

 

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