The forecast for non-farm payrolls is 150k. The whisper number is 500k. Such a wide range of forecasts means that SOMEONE will be surprised. Expect tomorrow to be a crazy day. Here’s my scenario analysis for non-farm payrolls:

The 580k hyperbolic forecast has caused many foreign exchange traders to position for a very strong non-farm payrolls report. Interestingly enough, the price action in the equity and bond markets indicate that these traders don’t buy the lofty forecast. Most forex traders probably don’t expect such a blowout number but it is reasonable to assume that a large number of those traders expect payrolls to exceed 250k and possibly even 300k. This is the bar that the market will be measuring non-farm payrolls by tomorrow and not the 150k consensus forecast. As in recent months, the private sector payroll number will be more important than the headline but these two numbers are not expected to diverge significantly. We expect the dollar to rally as long as non-farm and private sector payrolls exceed 250k but the extent of the dollar’s gains will hinge upon the strength of non-farm payrolls. Anything short of 250k will probably leave the market disappointed and a number weaker than 150k will cause the dollar to fall. The non-farm payrolls report is a notorious for triggering sharp volatility across the foreign exchange market and we don’t foresee a scenario that will leave the dollar unchanged post NFPs. As usual, USD/JPY will have the cleanest reaction to the non-farm payrolls report while high beta currency pairs such as the EUR/USD, GBP/USD and AUD/USD will respond to risk appetite. It will also be important to watch for revisions – the November number was surprisingly weak which means an upward revision is possible.

The dollar could react to the payrolls report in many different ways but here are the five most likely scenarios:

Scenario 1 : NFP and Private Payrolls Exceed 250k – Dollar Positive

Scenario 2: NFP and Private Payrolls Less than 150k – Dollar Negative

Scenario 3: NFP and Private Payrolls between 150k and 250k - Nominal Reaction in USD

Scenario 4: NFP Rise by Less than 150k, Private Sector Payrolls Exceed 200k > Mildly Dollar Positive

Scenario 5: NFP Rise by More than 150k, Private Sector Payrolls Less than 150k > Dollar Negative

Last time NFPs was released (and it was VERY bad), here is how the EUR/USD and USD/JPY reacted:

EUR/USD


USD/JPY
 

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.