How Will Non-Farm Payrolls Impact the US Dollar?
The US dollar has strengthened across the board today ahead of Friday’s non-farm payrolls release. This may befuddle some traders as the greenback’s price action conflicts with the higher jobless claims report and the deterioration in the employment component of manufacturing ISM. According to our non-farm payrolls preview, job growth should decline for the fourth consecutive month. The market is currently expecting non-farm payrolls to fall by 78k and for the US unemployment rate to rise to highest level in 3 years. There is even a possibility that job losses could hit -100k. Over the past month, consumer confidence hit a record low and planned layoffs as reported by Challenger Gray and Christmas increased 27.4 percent. Continuing claims are also on the rise as the problems in the US economy escalate. Many people including Warren Buffet will agree that the US economy is already in a recession. During the last 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. If this is true, we could see far more than 4 consecutive months of job losses ahead of us. In each of the past 3 recessions, the largest single month job loss was more than 300k. In this context, a 100k drop in April or May is not only realistic but nearly guaranteed. However, weak non-farm payrolls may not be enough to halt the recent rally in the US dollar. After the hawkish minutes from the FOMC yesterday, traders have rallied the greenback on the expectation that the Federal Reserve will not be raising interest rates again in June. Even if the drop in non-farm payrolls in the month of April is greater than the -80k decline in March, the Federal Reserve has the benefit of seeing the non-farm payrolls report for the month of May before making their next monetary policy decision. Therefore the market’s reaction to a bad number may be tempered for the time being and a good number of course would add fuel to the current rally in the US dollar. Sentiment and technicals also point to further gains for the US dollar and weakness in the Euro, which is discussed further in our Euro commentary. Meanwhile the manufacturing ISM number was stronger than expected along with core PCE. Although the 48.6 reading is still reflective of contractionary conditions, the performance of the manufacturing sector would have probably been worse had it not been for the benefits of a weaker dollar.

Euro Hits 1-Month Low, Sell-Off Could Continue
The Euro hit a one month low against the US dollar today and the sell-off could continue. At the beginning of this week, we outlined 3 reasons why the EUR/USD may continue to fall. The first was hawkish comments from the Federal Reserve, which we received. The second was the first flip in the FXCM Speculative Sentiment Index in over a year with the index now growing more net long Euros since the last report. The FXCM SSI is a contrarian indicator which means that a rise in net long positions is actually a bearish signal for the EUR/USD. The third reasons is technicals. Our technical analyst Jamie Saettele has been calling for a top in the EUR/USD for some time and now he expects the EUR/USD to break below 1.5342. The sell-off could continue just because of technical and sentiment reasons, but German retail sales are also due for release tomorrow and we expect a sharp deterioration in consumer spending. Retail PMI dropped into contractionary territory with the rate of decline similar to the 3.5 year record seen at the turn of the year. Although the labor market has been improving, the latest employment report shows that the improvements have slowed materially.

British Pound Shuns Economic Data
This week, economic data has had zero impact on the British pound. Over the past few days, the currency pair managed to rally on weaker economic data and today it sold off despite a smaller drop in manufacturing PMI. The move in the sterling is largely due to the overall strength of the US dollar although there were some positive news from the UK government this morning. According to the bank of England’s Financial Stability Report, the worst of the global financial crisis could be over. Prime Minster Gordon Brown also promised to cut corporate taxes to prevent UK companies from moving abroad. At the same the BoE warned that the country’s biggest banks could see major losses as the commercial mortgage market deteriorates. Nonetheless the UK economy is still in a vulnerable position which makes further gains unlikely.

Canadian, Australian and New Zealand Dollars Sell Off
The Canadian, Australian and New Zealand dollars have been range trading lately. Yesterday they all recovered against the US dollar and today, they are all lower. This is partially due to the recent volatility in commodity prices and the US dollar. Australian economic data was mixed with manufacturing PMI increasing but building approvals plummeting. Retail sales are due for release this evening. We believe that consumer spending should be strong given the stability of the labor market. There are no economic releases due from New Zealand or Canada but it is interesting to hear BoC Governor Carney say that Canada’s low food inflation is “almost unique” in the world. This tells us that they may not hesitate to lower interest rates again because for the BoC, inflation is not a major concern.

Yen Crosses Slide Despite Stock Market Rally
With the exception of USD/JPY, all of the Japanese Yen crosses sold off. The relationship between US stocks and carry trades appear to have broken thanks to stronger Japanese economic data. Both labor cash earnings and vehicle sales were increased from the prior month. However it remains to be seen whether this strength can continue since inflation is expected to take a big toll on Japanese consumer demand.

Kathy Lien is the Chief Currency Strategist at FXCM.