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US Non-Farm Payrolls are expected to rise nicely in January, following the consistent trend of recent months. Nevertheless, there are quite a few reasons for worries, mostly coming from Washington.

The US dollar has been under pressure since Bernanke’s recent softness. There is little chance that this trend will change. NFP Preview.

The US gained an impressive 200K jobs in December, and the unemployment rate fell to 8.5%. Such great news aren’t expected now, although job growth is likely to continue.

The employment component of the ISM manufacturing PMI showed another month of nice growth. Also the early Philly Fed Index had a healthy employment component.

In the private sector, ADP’s report showed a good growth of 170K jobs. On the other hand, it included a significant downwards revision to its superb report from December: a revision from +325K to 292K.

Government Impact – In 2 Manners

When moving from the private sector to the public sector, the picture is different. Net government layoffs weighed on job growth in recent months. It wasn’t enough to counter the private sector, but it curbed growth. This trend will likely continue.

And in January, the government will likely have a bigger impact on the private sector as well: part of the growth seen in December was related to tax incentives that were about to expire.

Well, they have expired now, and this could weigh on job growth in the private sector.

TrimTabs, which analyzes jobs via income tax, adds to the negative sentiment.

Impact on Currencies

Since Bernanke’s extended low rate pledge and hints of upcoming QE3, the dollar has been under severe pressure. The markets are seeing another round of dollar printing and this is the main driver of the markets, with other events (such as the European debt crisis) playing second fiddle at the moment.

One of the worries expressed by Bernanke was the weak job market. So, only a strong growth in jobs and a significant drop in the unemployment rate can make the doves reconsider.

Regarding the unemployment rate, the recent stability of weekly jobless claims in relatively low ground (around 375K for the moving average), provides hope for a the same unemployment rate of 8.5% or even a drop to 8.4%.

This will not be enough for Bernanke.

Consensus of job growth stands at around 150K, and also 170K could not be ruled out if it weren’t for the worries of government impact.

  1. If these levels are really seen, currencies will likely trade very choppily, but not long term impact will be seen.
  2. If job growth exceeds 200K and the unemployment rate drops below 8.4%, it will lower the chances for QE3, and the dollar could rise. The chances are low.
  3. In case job growth falls below 100K, the justification for action by the Fed will increase, and the dollar will likely plunge, even against the troubled euro.

In any case, this event is highly volatile and has special characteristics. Please read the  5 notes for Non-Farm Payrolls trading and trade with care.