What Level of Non-Farm Payrolls will be Good Enough for the Dollar?
The $100 million question for tomorrow is: What Level of Non-Farm Payrolls will be Good Enough for the US Dollar? The market currently believes that 70k jobs were added to US payrolls in the month of January, but if payrolls match this forecast, how much will it really help the dollar? When looking at non-farm payrolls, what traders need to think about is what it means for US monetary policy going forward. Is job growth good enough to slow the Fed down or is it bad enough to force the Fed to deliver another big rate cut? Since the last NFP release, interest rates have been cut by 150bp. One of the main reasons is the weakness of the labor market. In December, only 18k jobs were added to US payrolls but the private sector actually lost 13k jobs. According to the leading indicators for non-farm payrolls, job growth should rebound in the month of January. However in order for there to be a meaningful rally in the US dollar, we would need to see more than 100k jobs added to US payrolls or 70k plus a strong revision to the December figure. A sharp sell-off in the dollar will be triggered by any reading less than 50k. What happens if payrolls are between 50k and 100k? Assuming that there is no major revision to the December figure, the US dollar should rally, but the rally will probably be short lived since job growth around those levels will not stop the Fed from continuing to lower interest rates. In addition to the labor market report, we are also expecting the final numbers for the University of Michigan consumer confidence survey, manufacturing ISM and construction spending. All of these reports are expected to be dollar negative because they represent the most vulnerable sectors of the US economy. Personal income and personal spending were released today and they were stronger than expected, but any optimism was offset by the sharp rise in jobless claims which is part of the reason why we no longer expect a blowout NFP number.

Carry Trades Rise as Traders Hesitantly Take on Risk Ahead of NFP
The stock market closed up 200 points today, which should have been the market’s proper reaction to yesterday’s 50bp rate cut by the Federal Reserve - but better late than never. Risk appetite is slowly returning to the markets which suggest that equity traders may be banking on a strong non-farm payrolls report. We caution against becoming overexcited about carry traders at this moment because there is still a lot of volatility across the financial markets. Also, the relationship between equities and carry trades is starting to break down and that is clearly evident today because the 200-point rally in the Dow should have triggered a more meaningful bounce in carry trades. Unfortunately, USD/JPY is only up 20 pips from yesterday’s close while GBP/JPY is only up approximately 60 pips. Last night’s Japanese economic data was mixed with manufacturing PMI holding steady, labor cash earnings falling short of expectations, and construction orders rebounding. As usual, Japanese data has had no major impact on the Yen crosses but comments from Bank of Japan member Nishimura last night is worth mentioning. Nishimura said that the BoJ will not rule out any policy options. Although the market has been mostly focused on a rate hike from the BoJ, his comments suggest that they may open to cutting rates if their economy slips into a recession.

Euro: Bumping Up Against Resistance
For the EUR/USD, the 1.49 price level seems to be an insurmountable barrier. Today the currency pair made a third attempt to close above the resistance level but has once again, failed to do so. Some technicians will argue that the third time is the charm, but according to our technical analyst Jamie Saettele, the Euro rejected its triangle resistance which suggests that we should see a drop below 1.46 before a rally above 1.50. However the non-farm payrolls report has the power to alter the technical outlook for the EUR/USD. Significantly weak job growth is all that the dollar needs to fall to a new record low against the Euro. This morning’s mixed economic data has kept the currency pair range bound. A drop in the unemployment rate in Germany was met by a drop in retail sales. Manufacturing PMI is due for release tomorrow and the odds are in favor of euro bearish numbers.

British Pound Still Struggling to Hold on to Its Gains
Despite stronger economic data and a broad rally in carry trades, the British pound is still struggling to hold onto its gains. Nationwide house prices dropped by 0.1 percent in the month of January which was less than the market expected while the Gfk Consumer Confidence survey rose from -14 to -13. UK manufacturing PMI is due for release tomorrow. We continue to expect a major turn in the British pound because if the currency can not rally on stronger economic data or a rise in risk aversion, it may not even be lifted by weaker US data.

Australian and New Zealand Dollars Extend Gains, but Canadian Dollar Ends Rally
The return of risk appetite has helped the Australian and New Zealand dollars extend their gains against the US dollar. Economic data has also been supportive with the New Zealand trade numbers beating expectations and Australian private sector credit holding steady. Gold and oil prices are lower but only marginally. Although we remain bullish the Australian and New Zealand dollars, it is important to mention that the Australian dollar is nearing the top of its 3-month range while the New Zealand dollar is bumping up against the top of its 4-month trading range. The Canadian dollar on the other hand is back above parity. There was no major catalyst since GDP was right in line with expectations. Also Finance Minister Flaherty was relatively optimistic when he said that even though the Canadian economy is expected to slow, they are in a better place than other members of the G7. Raw material and industrial product prices are due for release tomorrow.

Kathy Lien is the Chief Currency Strategist at FXCM.