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We again reach the monthly circus: Non-Farm Payrolls. And in this publication, it is of high importance due to the critical impact on the upcoming lengthened FOMC meeting due later in the month. NFP Preview.

Last month’s Non-Farm Payrolls report was finally good: not extraordinary, but a gain of 117K still points to growth, and not recession. That release, although being important as always, was overshadowed by Trichet’s initial refusal to help Spain and Italy, and later by the credit rating downgrade of the US. This release has all the stage to itself:

The ECB meeting is only next Thursday, so it is off the agenda. In the recent public appearance by Ben Bernanke in Jackson Hole, he tried to pass the ball to the government, but also announced that the next FOMC meeting will be extended to two days, in order to “discuss possible tools”.

The recent meeting minutes from the August meeting have shown that there is some will for further easing. This comes despite the fact that there were three dissenters from the decision to pledge low interest rates until mid 2013. It also comes due to lack of deflation – the main reason for QE2.

The decision to deploy new tools, be it QE3 or other options, depends a lot on the all-important jobs data.

What can we expect?

The overall picture of the US economy is quite gloomy. Slowdowns were felt in many indicators: consumer confidence indicators, the  disastrous Philly Fed Index and more figures. Some points of light were seen in retail sales and factory orders.

According to the ADP report, the private sector gained 91K jobs in August, within expectations. This number isn’t necessarily similar to the official number for the private sector, and it doesn’t include the public sector.

Contrary to last month’s publication, we don’t have the ISM Non-Manufacturing PMI and its employment component prior to the release. The services sector is the vast majority of the economy.

Official market expectations stand on a gain of 90K jobs. A slightly lower figure of between 40K to 70K will not come as a big surprise.

Regarding the unemployment rate, no significant change is expected. Weekly jobless claims have been quite stable during the month. The same figure of 9.1% or any number between 8.9% and 9.3% will likely have little impact, and leave the stage for the Non-Farm Payrolls.

How will the dollar react?  

This time, “normal” behavior is expected: a good figure will help the dollar, and a weak one will hurt it. In some of the previous releases, a weak result triggered risk aversion, due to fears of a global slowdown.

Why normal this time? The proximity of the important FOMC decision on September 21st means that a positive result will decrease the chances of QE3 or other accommodative  measures. No new dollar printing will help the dollar. A bad figure will increase the pressure on the Fed to do something to ease conditions and weaken the dollar.

  • A gain of over 150K will boost the dollar. This will be surprising strong growth in jobs that will show that the economy is not going down.
  • A loss of jobs will sink the dollar. This didn’t happen in quite a long time, and will show that a recession is awaiting.
  • But also a result that is within expectations, or somewhat below above will rock all the currencies. There’s a lot of focus on this release.

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.

In addition, this publication comes at the end of the summer, with many traders back at their desks. Action is guaranteed.

Further reading:

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