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2011 begins with the last Non-Farm Payrolls report for 2010, and it will probably be a good one. Here’s what to look out for, and how it will impact currencies.

The last Non-Farm Payrolls report, for November, was terrible. Only 39,000 were added, with weakness in all sectors. The expectations were for a much stronger rise. Weekly unemployment claims were falling, the purchasing managers’ indices were on the rise (including the employment component) and also the ADP was rising. Why?

It’s still hard to tell. An upwards revision of November’s figure is now expected. But November is already old news, and we’re looking at December’s report published on January 7th.

Expectations are high once again. First and foremost, weekly unemployment claims, that usually serve as a great indicator,  continued improving and even fell below the 400K just before the year’s end. Throughout most of 2010, weekly jobless claims ranged between 430K to 500K.

In November and December, we’ve seen improvement. No one time green shoots, but rather constant improvement. The last figure, 388K, isn’t only under the 400K mark, but also the lowest since July 2008, and so is the 4 week moving average.

Also other figures published recently, such as the Chicago and Philly PMIs, exceeded expectations and showed more economic activity. Even the troubled housing sector showed progress.

So, the current consensus stands on a gain of 136,000. A gain of 200,000 won’t be a big surprise for me.

Impact on Forex

Unless we get really terrible news from Europe, or any major, bad unexpected event during the week, the reaction is likely to be “normal”, meaning that a big gain in jobs will boost the dollar, and a small gain will weaken it.

A figure well over 200K is likely boost the dollar, especially against the more vulnerable currencies such as the Euro and the pound. A weak result is due to weaken the dollar, especially against the Japanese yen.

The Canadian dollar will be a tricky play, as Canadian employment figures are released just 90 minutes before the American ones, and they will distort the movements of USD/CAD. The strong Australian dollar is likely to weather a strong jobs report from the US, and make stronger gains on a bad report.

The unemployment rate, will continue to play second fiddle, and is expected to tick down from 9.7% to 9.6%. Only a jump above 10% will weigh on the dollar, and so will a drop to 9.2% or lower. Anything  in between will leave the focus on the Non-Farm Payrolls.

In any case, the monthly circus around this event means that trading conditions are far from normal. I highly recommend reading my 5 notes for Non-Farm Payrolls trading.

Good luck!