USD: Why You Shouldn't Bank on Strong Non-Farm Payrolls

US non-farm payrolls is traditionally one of the most market moving pieces of data for currencies and equities but its impact depends on how the jobs report affects monetary policy. In the case of the Federal Reserve, they've made it clear that after lowering interest rates three times this year, further easing is unnecessary. So if NFPs rise more than expected, it would validate their on hold stance and alternatively, if the numbers are weak, the central bank will still keep interest rates steady when they meet next week.

Does not mean that the US dollar will shrug off payroll surprises? No.

Economists are looking for very good numbers and the arguments in favor of a softer payrolls report exceeds a stronger one so there's a big disconnect from expectations and data which can lead to volatility. According to ADP, private payrolls rose only half the amount of October, 4 week average jobless claims increased, Challenger reported fewer declines in layoffs and in the manufacturing sector, jobs were shed at a faster pace. Continuing claims were unchanged and the confidence indicators offset each other with Conference Board reporting the 4th consecutive month of weaker sentiment and the University of Michigan reporting an improvement in confidence. Yet we can't ignore the services sector, which added jobs at its fastest pace in 4 months - this number has the strongest correlation with NFPs and is the only reason why payrolls could rise. Economists are looking for the US to add 185K jobs in November, up from 128K in October. They are also looking for wage growth to accelerate and the unemployment rate to hold steady. While we believe that job growth improved over the last month, we are skeptical that it increased as much as 185K and anything short of 160K could trigger a sell-off in the US dollar.

Risk appetite is also wobbly which means that a softer report could have a bigger impact on USD/JPY and other major currencies than a strong one. If job growth falls short of expectations and wage growth fails to improve like economists anticipated, USD/JPY could fall towards 108 and EUR/USD could extend its gains to 1.1150.

Arguments in Favor of Weaker Non-Farm Payrolls

ADP Employment Gains Shrink to 67K vs. 121K in October

4 Week Average Claims Rise to 217K from 215K

Conference Board Confidence Declines for 4th Straight Month

Challenger Reports -16% Drop in Layoffs vs. -33.5%

Employment Component of Manufacturing ISM Contracts Further

Arguments in Favor of Stronger Non-Farm Payrolls

Employment Component of Services ISM Highest Since July

Stronger University of Michigan Consumer Sentiment Index

The US is not the only country with labor market numbers scheduled for release Friday. Canada also releases its jobs report and like the US, improvements are expected. The difference is that the bar is set low for Canada and high for the US. Economists are looking for job growth to return in November after falling in October. According to IVEY PMI, employment conditions rose back to expansion levels after contracting for 2 months in a row. The Bank of Canada's less dovish outlook sparked a major reversal in USD/CAD on Wednesday that was confirmed by this morning's IVEY report. If jobs beat expectations as well, we should see USD/CAD underneath 1.3150.

Euro and sterling extended higher on Thursday while the Australian and New Zealand dollar rallies fizzled. The US is still describing trade talks as going well but China wants the US to reduce tariffs before agreeing to Phase 1 trade deal. The prospect of a Tory win and the hope for a massive spending increase in Germany supports the European currencies but at the end of the day, all of the major currencies will take their cue from tomorrow's US non-farm payrolls report and fresh trade headlines (if there are any).