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Now more than ever, the change in non-farm payrolls for the month of March will determine the outlook for the US dollar and US monetary policy.  All but one of our leading indicators for non-farm payrolls point to another month of job losses, which means that a negative print alone will not be enough to drive the US dollar lower.  The dollar has been rebounding in the days leading up to the non-farm payrolls report and interest rate expectations for the FOMC meeting at the end of this month are strongly skewed in favor of a 25bp versus 50bp cut. We have seen these expectations change on a dime in reaction to incoming economic data and given the fact that the non-farm payrolls report is the most market moving indicator for the US dollar, there is no question that a weak release could alter market expectations significantly. 

Could Non-Farm Payrolls Drop by 100k?

In the month of February, the US economy lost 63k jobs, which marked the second consecutive month of negative job growth.  This is certainly bad for the US economy, but not as bad as it has been in past recessions.  Although Bernanke stopped short of saying that the US economy is already in a recession, the fact that he indicated the possibility of a recession this year is monumental because yesterday was the first time in this business cycle that he had acknowledged what the market has known for some time. 

Over the past 3 decades, the US economy has gone through 3 recessions.  In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months.  Many people argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices.  If this is true, we will see far more than 3 consecutive months of job losses.  Also expect the level of job losses to climb because in each of the past 3recessions, the largest single month job loss was more than 300k!  In this context, a 100k drop over the next few months is not only realistic but practically guaranteed.

The following chart illustrates the strong correlation between the employment component of service sector ISM and non-farm payrolls.  The last time, the employment component (blue line) was at current levels, job losses were double the drop in February.  Could there be a rebound in NFPs this month given the rebound in the employment component of ISM in February?  Yes, but consider it just a rebound before a more serious deterioration in the US labor market. 

Jobless Claims Also Hit Recessionary Levels

Jobless claims have also hit recessionary levels. For the first time in over 2 years, jobless claims breached the 400k mark.  If we exclude the 2 weeks after Hurricane Katrina, these are actually the worst levels since the last recession.  Taking a look back at time when there was a string of consecutive job losses, on average jobless claims were well in excess of 400k.  It is important to mention however that the 407k surge is not included in the latest payroll report.  It will either be included in the revision or the April non-farm payrolls report.  Therefore a rebound in non-farm payrolls in March is not out of the question.

ADP Could Overestimates Non-Farm Payrolls

The primary argument for a rebound in payrolls is the jump in the ADP employment report.  However given that ADP has overestimated payrolls growth for the last 6 months, the accuracy of their report, particularly the positive print remains questionable:

Change in Non-Farm Payrolls: -50k Forecast,  -63k Previous Unemployment Rate:  5.0% Forecast,  4.8% Previous Change in Manufacturing Payrolls:   -35k Forecast,  -52k Previous Average Hourly Earnings:   3.6% Forecast,  3.7% Previous Average Weekly Hours:   33.7 Forecast,  33.7 Previous 

Of the 79 economists polled by Bloomberg, the most optimistic forecast is by Argus Research who calls for 64k job growth. The most pessimistic is ING Financial who is calling for job loss of -150k.  Most economists expect a negative print, but the range of estimates is extremely wide which means that traders should expect sharp volatility in the US dollar and the financial markets in general on the back of the non-farm payrolls release. 

In order to determine the strength of non-farm payrolls, we look at 10 pieces of data that we call the leading indicators for non-farm payrolls.  Five out of the ten releases point to greater job losses, four points to an improvement and one is neutral.   More specifically, jobless claims are on the rise, consumer confidence hit a 4 year low, Challenger Gray and Christmas announced a 9.4 percent increase in planned layoffs by US firms and strike activity cut 1100 jobs from US payrolls.  On the other side of the spectrum, we had the rebound in ADP, the improvement in the employment component of manufacturing ISM (although it is still contractionary) and the increase in online job ads.  The employment component of service sector ISM is usually a very reliable leading indicator for NFPs, but it held steady last month which makes NFPs a particularly difficult call.   

Arguments for Weaker Non-Farm Payrolls

1.    Employment Component of Non-Manufacturing ISM Holds Steady

Will March Non-Farm Payrolls be Better or Worse than February?

Nearly all of the leading indicators for non-farm payrolls indicate that March was a month of job losses.  However, even though the odds are skewed towards greater job loss, conflicting reports make it important not to rule out the possibility there was less jobs lost in March than there was in February.  Either way, the state of the labor market will grow increasingly worse in the coming months even if there is a rebound in March.  For traders, if non-farm payrolls are better than -63k, the dollar should rally and rate cut expectations will grow in favor of a 25bp rate cut because everyone will believe that the US labor market has hit a bottom.  If it is worse, expect the US dollar to not only resume its slide, but make a run for a new record low in the coming weeks.  As usual, also watch for revisions to the February figure because it can easily exacerbate or negate the changes to the current month’s headline number.

The most important thing to remember is not to be misled by any improvements because the labor market will continue to deteriorate.  Bernanke has already warned that the unemployment rate will be on the rise and because of that, we have still not seen the real bottom in the US dollar. 

Retail sales in Europe unexpectedly fell in February. Sales in the region fell 0.2%, led by a 3.1% decline in Germany. Rising inflation stoked by increasing energy and food costs have eroded consumer’s purchasing power. Food, drink and tobacco sales fell for the fourth straight month as consumer pull back as their confidence wanes. The ECB has maintained their benchmark interest rate in an attempt to reign in inflation, but as the economy continues to suffer, the increasing downside risks may force them to consider cutting rates, in order to avoid a prolonged contraction.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

The Canadian dollar continued its two-day growth against the U.S. dollar and the Japanese yen today, as the commodity markets showed that are still able to grow.

Canada’s dollar touched the two-month low against the U.S. dollar on Tuesday, but started to recover quickly after that and finished every day of the current month with a moderate gain.

Rising commodities’ pices boosted Canada’s growth expectation improving its currency’s positions on the Forex market. While the yesterday’s testimony by Ben Bernanke showed that U.S. still has some problems to deal with, Canadian currency might extort benefits from its status as the commodity-bound security.

USD/CAD rose from 1.0163 to 1.0134 as of 9:00 GMT today, the overall monthly growth so far was 1.1% for this currency pair. CAD/JPY grew even faster — since the beginning of April it rose almost 4.3%.

Apr 3

US ISM Non-Manufacturing (MAR) (14:00 GMT; 10:00 EST)
Expected: 48.5
Previous: 49.3

What Are The Markets Facing?

Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have deteriorated in March, as the Institute for Supply Management index is estimated to fall to 48.5 from 49.3. If the index holds below the 50 level as expected, the news will be a very bearish sign for the US economy as the data would only add to the mountain of evidence pointing towards a recession in Q1 2008. Indeed, the index has already held below this critical point over the past two months, as orders and overall business activity have proven lackluster. Like the ISM Manufacturing report, the employment component of ISM Non-Manufacturing will be watched carefully as a gauge for Friday’s Non-farm Payroll report. Thus far, most indicators - including ISM Manufacturing and the ADP employment report - both suggest that labor market conditions improved slightly in March, but still remain in a dismal state. This is unlikely to come as a major surprise to the markets, as even Federal Reserve Chairman Ben Bernanke said on Wednesday, “…in light of the sluggishness of economic activity and other indicators of a softer labor market, I expect it (the unemployment rate) to move somewhat higher in coming months.” Nevertheless, if ISM Non-Manufacturing proves to be very disappointing, the news could lead fed fund futures to quickly price in more aggressive rate cuts - such as a 50bp reduction - in the near term. On the other hand, a reading in line with or better than expectations will leave fed fund futures to continue pricing in a more moderate 25bp cut to 2.00 percent.

Bonds - 10-Year Treasury Note Futures

Treasuries remain heavy since backing off from resistance at the 119-12 level, and the contract may ultimately test trendline support at 115-28/30. Upcoming event risk for Treasuries includes ISM Non-Manufacturing, and if the data is surprisingly strong, price is likely to plummet. On the other hand, a disappointing release could lead Treasuries to rebound toward 119-12, as futures will quickly shift to price in a 50bp cut on April 30.

FX - EUR/USD

The EUR/USD has found support at the 20 SMA after a brief dollar rally, inspired by a rebound in the ISM manufacturing index. The pair has breached the technical support level four of the past eight days, but the lack of significant follow through has prevented a clean break. Chairman Ben Bernanke’s testimony before the joint economic committee failed to provide any clear direction for the pair, despite the affirmation that the economy will experience a contraction in the first half of the year and his lack of concern regarding inflation. Traders have continued to price in a 50 point rate cut at the next Fed meeting, with many speculating that the benchmark rate may ultimately reach a low of 1.00 percent. However, the financial system has started to regain its footing on the back of the recent Bear Stearns bailout and cash infusion by the central bank. The markets have seen confidence and risk appetite start to return, evidenced by reductions in swap spreads and volatility indexes. The upcoming ISM Non-Manufacturing will provide significant evidence as to the extent of the forthcoming economic contraction, and may influence longer term trading trends. A rebound is services may signal a bottom in the economy and will increase speculation that the Fed’s next rate cut will be shallower than expected, which may have dollar bulls looking to retest the 1.54 support level. Conversely, if the industry resumes its downward trend, it will increase recession fears and may push the Euro towards testing 1.600.

Equities - Dow Jones Industrial Average

The Dow Jones Industrial Average’s bounce from support at the 50% fib of the rally from 11,731 - 12,622 at 12,177 managed to break through the 50 SMA as well. Typically, when we see large gains (such as on Tuesday), the next trading session is relatively subdued (as we’ve seen on Wednesday). Nevertheless, the long-term trend remains to the downside, and in the near-term, substantial resistance looms above at the 12,718/25 level where we have the February highs and the 100 SMA. Risk trends will remain the biggest driver of day-to-day price action, but upcoming ISM Non-Manufacturing data could weigh the DJIA toward trendline support near 12,250, as the index is expected to hold below the 50 boom/bust level for the third consecutive month.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

• British Pound: Watch Out for More Housing Market Problems
• Euro Recovers After Bernanke Comments

Fears of a Recession Drives Renewed Dollar Weakness
The US dollar has resumed its slide as traders give in to the Fed’s cautiousness. With Wall Street and Main Street both feeling the pain of slower growth and a depressed housing market, Bernanke warned that there could be a contraction in the US economy in the first half of the year. Although the Fed Chairman stopped short of admitting that the US economy is already recession most Americans are already acting like it. The NY Times for example has a story today about making the most out of your microwave. Interestingly enough, according to Fed Fund futures, expectations for a 25bp rate cut at the end of the month has increased to 90 percent. This is partially due to the rebound in the ADP  employment report, which is signaling a stronger non-farm payrolls number for Friday. We are skeptical of the accuracy of this report given the fact that ADP  has overestimated private sector payrolls growth for the last 6 months by an average of 72k jobs. Unless we see an improvement in the employment component of service sector ISM tomorrow, we continue to believe that the pace of job growth will worsen in the coming months. Challenger Gray and Christmas reported a 9.4 percent increase in layoffs last month compared to a year ago. This is in line with the recent layoffs that have been announced by Wall Street banks. On inflation, Bernanke said that even though it is a concern, inflation should moderate, which means that for the time being boosting growth is their top priority. Looking ahead, non-farm payrolls will be critical in determining how many more rate cuts we will see from the Federal Reserve. In the beginning of the year, the majority of the market believed that the central bank would stop cutting interest rates at 2.00 percent. Now that we are 25bp away from that level, figuring out how much further the Federal Reserve could ease interest rates should be the market’s main focus.

British Pound: Watch Out for More Housing Market Problems
Last week, we indicated that the British pound could break 2.0 if disaster hits UK mortgage lenders. The currency is trading below 2.0 against the dollar, but thankfully there has been no disaster. However, trouble is still brewing for mortgage lenders or banks that have mortgage lending divisions and things are only expected to get worse. First Direct, which is apart of HSBC announced today that they will be withdrawing all of the mortgages to any homeowners who are not existing customers. Standard & Poor’s is also reporting that Lehman Brother’s has stopped writing mortgages to 2 of their UK units. Halifax, the UK’s biggest mortgage lender is expected to follow suit within days. Being forced to turn away business because you have too many customers should be perceived as a good thing, but unfortunately in the world of mortgage lending in UK, the only reason why First Direct and Halifax are being flooded with new applications is because other lenders like Nationwide gave taken measures to increase the interest rate on loans or withdraw their mortgage lending products completely. If everyone stops providing new mortgages, it could cause the entire UK housing market to freeze up. Meanwhile, this morning’s UK economic data was mixed with construction sector PMI contracting for the first time in six years and net consumer credit hitting a five year high. Service sector PMI is due for release tomorrow and unlike the manufacturing sector, we expect activity in the service sector to slow.

Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.

Euro Recovers After Bernanke Comments
It has been a volatile day for the EUR/USD. The currency first rallied on the stronger inflation report, then slipped following the release of the dollar positive ADP report, and resumed its rally after Bernanke’s comments. Inflation is hot which is hardly a surprise given the rise in food and energy prices. We had previously indicated that the Euro’s strength could reverse if German banks begin hemorrhaging losses. Yesterday Deutsche Bank reported additional write downs and today WestLB announced $2.5 billion in losses. Yet German growth is only expected to slow modestly according to the German DIW economic institute which downgraded its growth forecasts by only 0.1 percent to 2.0 percent. Eurozone retail sales are due for release tomorrow. The steep drop in German retail sales suggest that we could see a similar decline in consumer spending for the entire region.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

Australian, New Zealand and Canadian Dollars Rebound
The New Zealand Dollar, Australian Dollar and the Canadian Dollar, rebounded against the mighty greenback thanks to a recovery in commodity prices. Traders did not have much to key off of today, but the next 24 hours could prove to be much more eventful, with Australia releasing their service sector PMI figure which is anticipated to decline, as high interest rats would likely result in falling business demand. New Zealand is set to release the ANZ Commodity prices, which should increase as demand for soft commodities continue to rise. Although Canada has no releases tomorrow, investors are eagerly anticipating for the end of the week, when some major market moving data are set to release, starting with the unemployment rate and ending with Ivey Purchasing Managers Index.

Tell us what you think on the Canadian dollar Forum.

Japanese Yen Extends Losses on Little Economic Data
All of the Yen crosses have rebounded today despite little Japanese economic data. Compared to a few weeks ago, risk appetite has certainly improved. Gold prices are well off its highs, but as we all know, risk appetite can change on a dime. Non-farm payrolls will be critical in determining whether we see a more meaningful rally in carry trades. Although we could still see a further bounce, longer term trend for USD/JPY and other the Yen crosses, is still down.

Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.

By Kathy Lien, Chief Strategist of DailyFX.com

Contact Kathy Lien about this article at klien@dailyfx.com

The British Pound crosses should continue to bounce with the GBPCHF appearing the most bullish near term.  Longer term bullish reversals may be underway in the GBPCAD and GBPNZD.

There are 5 waves down from the October high at 2.4205.  This may comprise wave 3 of what turns out to be a 5 wave drop from 2.4963.  Under this count, a 4th wave is underway now and could test the 38.2% of 2.4205-1.9421 at 2.1249.  This intersects with the former 4th wave as well.  Risk on longs should be at 1.9649.

There is no change to the idea that “a major bullish base has formed”.  We view rally from 1.9011 to 2.0906 as the first wave in a bull cycle and the drop from 2.0906 to 1.9307 as the second wave in that bull cycle.  Whether the cycle proves to be 3 or 5 waves does not matter at this point.  Both scenarios call for a rally through 2.0906 in the coming months.  This bullish outlook remains intact as long as price is above 1.9794.  A clean break through the 200 day SMA would inspire confidence in the bullish bias.

The count in the GBPAUD is not clear at this point but the series of lower highs since August 2007 keeps the bear trend intact.  The downtrend is reinforced by a resisting trendline drawn off of the 8/17/07, 12/18/07, and 3/20/08 highs.  The downtrend is strong as long as price is below 2.2133. 

The GBPNZD broke through a 6 month resistance line early last month and has held above that line for 1 month now.  This kind of action suggests that a large base is forming and that the GBPNZD is headed higher in the coming weeks and months.  The outlook is bullish as long as price is above 2.4474.