Dollar Might Tumble on Upside Surprise in Non-Farm Payroll

Moderating pace of recession has been the talk in the financial markets recently and all investors are looking forward to Friday's Non-Farm Payroll report for affirming this view. Economists expect the US job market to contract by another -620k in the month of Apr with unemployment rate jumping from 8.5% to 8.9%. However, recent economic data mostly point to a better reading. We'll discuss these 'leading' indicators and the possible impact of NFP to dollar below.

One of the most highly correlated indicators to NFP is indeed the employment components of the ISM indices. The employment component of ISM manufacturing index bottomed in Feb and had a very strong rise to 34.4 in Apr. On the other hand, the employment component of ISM non-manufacturing index bottomed at 31.1 last Nov. While there was some set back in March, the component did improve from 32.3 to 37 in Apr. While both were still in contraction region, the rise in Apr suggested that pace of contraction is slowing. Also, we may have seen the worst in job market contraction already and there should be some significant improvement, as implied by the indices in the near future, if not in Apr.

Conference Board Consumer Confidence is another indicator that's closely correlated with NFP as seen in the following chart. Consumer confidence bottomed at 25.3 in Feb and rose remarkably from 26.9 to 39.2 in Apr. The data also suggests that some strong improvement should be seen in NFP in Apr.

In addition, ADP report showed much less than expected contraction in the private sector by -491k only, best number since last October. Challenger layoffs rose by only 47%, least since last September. 4 Week average of initial jobless claims also fell by more than 14k.

Having said that, it's very likely that NFP will surprise on the upside this time with some chance to have the contraction improved to -400k to -500k level.

The dollar continues to be inversely correlated to stocks recently. Since April, Dow Jones Industrial Average has risen around 8.35%. On the other hand, dollar has depreciated over 9% against Australian dollar, over 7% against Canadian dollar and over 5% against Sterling. The greenback only managed to stay in tight range against Euro and Yen, which were both pressured by return of risk appetite.

Strong upside surprises in NFP will likely trigger extension in recent rally in stocks which in turn will trigger some sell off in the greenback. Among the major currencies, AUD and CAD will likely remain the ones to bet against dollar. Euro and Yen will be the ones to avoid in case of dollar weakness.

Source : Actionforex.com