The US non-farm payrolls report is commonly perceived as one of the most important economic indicators for the US economy as well as the US dollar.  This Friday's release for the month of September is even more important since it will deliver more concrete insight on the extent of Hurricane Katrina's impact on the US labor market.  Although the debate has now heated up, one thing that economists and traders can agree on is that more jobs will be lost than created in the month of September.  Right now, the market is calling for 150,000 jobs to be lost, but the range of estimates run as high as *400k to as low as *25k.  Both extreme points are forecasts made by leading investment banks, so we expect some analytical minds to be behind the predictions rather than pure gut instinct.  However, the reliability of the data is questionable, so it remains to be seen whether dollar bulls will take this report with a grain of salt and continue to push their rally forward or finally find a reason to take profits.  It will not be surprising to find skeptics pounding the table with any of the following points regardless of whether the number comes out exceptionally weak or strong:

Technical Changes to Counting Methodology Could Overstate Employment:  One of the biggest arguments that dollar bulls or bears will have is that the data is distorted and inaccurate.  Due to the disruptions brought on by Katrina, the Bureau of Labor Statistics (BLS) is revising the way that they estimate payrolls in the month of September.  The biggest change from their usual sampling practices is that businesses that do not respond to the survey will be considered closed and all of its employees will be excluded from the payrolls report.  Now the interesting thing is that the sample base usually covers the week (Sunday through Saturday) containing the 12th of the month, which means that the survey this time around will include any responses received from September 1 to September 17.  If you recall, most businesses in the affected regions were closed or evacuated during that time frame with the city of New Orleans not beginning to reopen until the weekend of September 15th, at which time we doubt that the first priority of the business owners was to report their payrolls to the Labor department.  This could be a big reason why the payrolls report may be discounted this month because if this is true, then we could have a sharp drop in payrolls for September but a big revision upwards in October.  The BLS themselves have already said that their changes to counting methodology has the risk of "overstating employment loss."   However at the same time there also some larger companies with offices in the region that may have kept employees on the payrolls for a few more weeks to only lay them off in the following weeks, which may help to offset some of the October rebound.

Confidence and Help Wanted Ads Make Forecast More Difficult:  Consumer confidence as measured by both the Conference Board and the University of Michigan surveys both declined in the month of September with the Conference Board's report falling by the most significant amount in 15 years.  The help wanted ad index has also been falling the month of August reporting the biggest drop since October 2001 and the lowest level in the index in 44 years.  With numbers this bad, it begs to question how strong the labor market really is and whether the risk is for a bigger rather smaller job loss.  Also, don't forget about Being, who had 20,000 workers on strike for a month before a contact was approved on October 3rd. 

ISM Surveys Show Different Results:  Adding more uncertainty to the report was the conflicting results of the ISM manufacturing and non-manufacturing surveys.  The employment component of the ISM manufacturing survey ticked higher for the month of September along with the overall index suggesting that job losses may not be all that bad.  However in contrast the service ISM survey dropped to the lowest level in 2 years with a corresponding fall in its employment component.  Since the US economy is mostly a service sector economy, the drop in the non-manufacturing survey seems to be particularly concerning.

Increase in Jobless Claims Quickly Retraced:  As for jobless claims, analysts had originally spelled out the doomsday scenario when Katrina hit, saying that jobless claims could skyrocket significantly with one analyst even predicting claims to shoot up to 800k the first week following the hurricane.  Jobless claims did indeed spike higher in the 2 weeks following the hurricane, but like a rubber band they quickly snapped back to more average levels.  Katrina related jobless claims continued to filter in but are slowing significantly.  So far 279,000 people have claimed that Katrina has forced them out of their jobs.  The government predicted a total of 400,000 jobs to be lost which means that another 121,000 people could be headed to the unemployment offices over the next few weeks.  Therefore it remains to be seen whether this trend will continue or if the remaining people without jobs will delay claiming benefits to the point that their numbers just get lost in the report.

Ex-Katrina Number not Expected to be Reported:  Unfortunately the BLS is not planning to report an ex-Katrina or pre-Katrina number, which could have given dollar bulls another reason to discount the report.  It is estimated that if it weren't for Katrina, the economy would have added approximately 175k jobs in the month of September, right in line with the healthy pace of triple digit job growth that we have been seeing over the past few months. 

Unemployment Rate Not to Be Impacted All that Much:  However, the unemployment rate, which is part of the household survey, is not expected to be impacted as significantly by Katrina as the establishment survey.  The unemployment rate is expected to rise two tenths to 5.1% from 4.9% but the reason why the impact could be limited is because individuals in the affected areas who do not respond to the survey will be labeled as "not in the labor force" because they will probably be busy rebuilding their lives rather than being "available and actively seeking work" which is the criteria for being included as unemployed in the household survey.  Average weekly hours are expected to remain unchanged while average hourly earnings growth is expected to accelerate by 0.2%.

How Fast Could the Snapback be?  Another reason why dollar traders could discount the significance of the payrolls report is because the economy generally snaps back quickly from hurricanes because of hiring needed to rebuild the communities affected, which is particularly important this time around.  Of the nine most recent deadly hurricanes, only three saw payrolls decrease in the month following the Hurricane.  Hurricane Andrew was the costliest hurricane before Katrina and in the month of the Hurricane, only 37k jobs were created.  In the month following the hurricane, payrolls leaped to 173k and on average, non-farm payrolls increased over 50% in the month after the hurricane. This suggests that the snapback could be just as significant this time around as it has been before, which means that even an in line number may not hold dollar bulls back for that long.

Overall, with traders extremely long dollars at this point, the market will probably have a bigger reaction to a weak number than a stronger number.  The extent and determination of the recent rally suggests that there probably aren't that many buyers left in the market while on the flip side dollar bears could be waiting for the momentum of a bad number to start snapping up the EUR/USD at a bargain.

Kathy Lien is the Chief Currency Strategist at FXCM.