US Non-farm payrolls for the month of September are due for release tomorrow and now more than the ever the market is riding on the event in hopes that it will bring us a much more exciting fourth quarter.  Volatility in the currency market has dropped so low over the past three months that most traders are begging for some excitement.  ECB President Trichetâ�,��"�s comments this morning cause a flurry of activity, but not enough to take us out of the EUR/USDâ�,��"�s recent trading ranges.  We continue to point out that the Bollinger Bands in the EUR/USD are the tightest ever since the currencyâ�,��"�s inception and if we look back 10 years with synthetic prices, there are only two instances when volatility was this low â�,�“ December 1996 and August 1998.  Both instances led to breakouts within 2 weeks and moves of over 1,000 pips in less than 2 months.  The hope is that non-farm payrolls can be a catalyst for a similar breakout so that we can finally see some interesting trading in the major currency pairs. 

What is Expected

Given that the payrolls release has the potential to move markets tomorrow, it is important to have a grip on what the market currently expects for the month of September.  Here are the numbers. 

Change in Non-Farm Payrolls: 120k Forecast,  128k Previous
Unemployment Rate:   4.7% Forecast,  4.7% Previous
Change in Manufacturing Payrolls:   -5k Forecast,  -11k Previous
Average Hourly Earnings:    0.3% Forecast,  0.1% Previous
Average Weekly Hours:    33.8 Forecast,  33.8 Previous

Will the Numbers Satisfy or Disappoint?

Now the question is will these numbers satisfy the market or disappoint it.  Taking a look at what we call the leading indicators for payrolls, the odds are more in favor of a weak release over a stronger one.   Yesterday, payrolls processing company ADP reported that US corporations added only 78,000 jobs in the month of September.  Although ADP got a bad rep after over forecasting payrolls significantly in the month of June, they are the largest payrolls processing company in the nation and their directional bias has been historically spot on and since then they have also adjusted their accounting methodology.  This suggests that we could see a drop in payrolls that is larger than the 8k drop currently forecasted by the market.  In addition layoffs are up 54 percent in the month of September compared to the previous month and up 40 percent from a year ago according to the monthly survey by Challenger, Gray and Christmas.  Furthermore, we also saw a drop in the Monster.com and Hudson Employment indices.  Yet the derivatives market is still forecasting 120k job growth, which is in line with analyst estimates.   We should still see triple digit job gains instead of double digits as the four week moving average of jobless claims drop to a low of 313.5k.  Although the manufacturing sector will continue to see job losses as suggested by the ISM report, the service sector should see job growth as indicated by the up tick in the employment component of the service sector ISM report.

Seasonal Benefit

There is also an interesting observation by IFR Markets that keeps the possibility of strong job growth in the month of September on the table.  According to their study, over the past 28 years, â�,��"September has never been the weakest month of job creation for the year.â�,�  Given that the weakest job growth this year was 75k in the month of May (which was later revised to 100k), this increases the odds that we will see payrolls somewhere between 100 to 120k, with the most likely reading closer to the lower end of that range.

Will It Matter for the Dollar?

Yet the biggest question is whether this will matter for the US dollar.  The short term sentiment in the market at the moment is more pro dollar than anti dollar which suggests that the market is banking on a number that still indicates decent growth in the US economy.  The Federal Reserve is far from raising interest rates which means that a strong number between 120 and 150 will probably only lead to a dollar rally that tests the currencyâ�,��"�s recent highs against the Euro (1.2625) and the Japanese Yen (118.40).  Further strength beyond that may me difficult.  On the flip side, the market is waiting for a sign that could push the Fed to cut interest rates sooner rather than later.  If payrolls sink below 100k, we could see a sharp dollar sell-off that has the possibility of continuing onto the summers low.  Either way, our biggest hope is for a big move that can set the tone for fourth quarter trading. 

Kathy Lien is the Chief Currency Strategist at FXCM.