(03/06/09) Friday’s Non-Farm Payrolls Report May Fall by Most Since

The US dollar will encounter one of its most market-moving pieces of data on Friday: the non-farm payrolls (NFP) report. The US dollar index has been consolidating above the 2008 highs, and with job losses anticipated to have reached the worst levels since October 1949, the news could determine whether or not the currency will reverse or continue higher.

What Is the Market Expecting for February Non-Farm Payrolls?

Arguments for Another Sharp Drop in Non-Farm Payrolls

The ADP private payrolls gauge reported its 13th straight drop in net payrolls, amounting to 697,000
Initial jobless claims held near 26-year highs, while continuing claims have remained near all-time highs
Challenger job cuts surged for the 12th consecutive month at a rate of 158.5% in February from a year ago.
ISM Manufacturing employment gauge reached the worst level since record keeping began in 1948
ISM Non-Manufacturing index shows employment conditions worsened for the tenth straight month
Conference Board’s consumer sentiment survey hit the lowest levels since records began in 1967

Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the 14th straight month in February. At the time of writing, Bloomberg News was calling for NFPs to plunge by 650,000, leaving 2009 to start on a very negative note. Looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 500,000 and 800,000, but based on leading indicators like jobless claims, we agree with the consensus forecast and anticipate a decline of 600,000 or more. Meanwhile, something that is starting to garner even more attention is the unemployment rate, which is projected to hit 7.9%, the highest since January 1984.

The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9% up to 7.6% in January 2009, while personal consumption has slowed from 1% in Q4 2007 down to -4.3% in Q4 2008.

How Will the US Dollar React?

In preparation for trading this top event risk, we need to put it into the context of speculation and consider the impact this employment gauge could have in altering expectations for growth in the US compared to its global counterparts. More important for forex market price action, though, is that fundamental US data does not tend to have a logical impact on the currency. Instead, risk trends remain in the driver’s seat, so traders must consider the impact of NFPs on risk appetite. Indeed, if we see that NFPs fall more than expected and the unemployment rate climbs above 7.9%, the news could trigger losses in risky assets like stocks, trigger flight-to-safety, and thus, boost the US dollar against currencies like the euro. On the flip side, if job losses and the unemployment rate don’t climb quite as much as anticipated, the news could spark enough optimism to boost demand for stocks and forex carry trades, and subsequently lead the greenback lower.