This Friday, we are expecting April Non-farm payrolls and now more than ever, with the EUR/USD trading near its record highs, the amount of jobs created last month will be critical in determining where the dollar is headed next. For the past few months, the stability of the labor market has pacified the markets concern about the housing market because as long as people have jobs, they will continue to pay their mortgages. However the problems in the housing market are worsening with sharp drops seen in existing, new and pending home sales for the month of March. If the labor market buckles as well, then the US economy could be in serious trouble. The two week consolidation that we have seen in the EUR/USD indicates that traders are waiting for the non-farm payrolls release before deciding whether to take the EUR/USD above 1.37 or back below 1.35. With a skyrocketing stock market and strong corporate earnings, the downside surprises that we have seen in some of the leading indicators for NFP has traders and analysts completely befuddled. Even though the current consensus estimate for payrolls is 100k, according to the Bloomberg survey, the range of estimates is between 40k and 160k. This divergence suggests that payrolls can be anyones game, so as usual anticipate a volatile trading session tomorrow.

What does this mean for the US Dollar?

When examining payrolls, it is important to look at both the headline number and the revisions. In many of the prior months, revisions have negated downside surprises and payrolls and exacerbated the upside ones. With a 180k print in March, there is a decent chance for significant revisions to the prior months data. If both the headline and revision number turns out to be dollar negative, then market watchers will pounce on the idea of sharply slower growth in the second quarter. The labor market is the backbone of the US economy. Weak job growth poses a big threat to consumer spending. Even though the Federal Reserve is mostly concerned about inflation, with the housing market turning down, payrolls less than 100k will force them to slam the door on future rate hikes and look to cut interest rates this year. On the other hand, if the payrolls figure catches the market by surprise and increases by more than 100k, with no revisions to offset the dollar bullish number, the Federal Reserve will have the flexibility to leave interest rates unchanged at 5.25 percent. This would send the dollar skyrocketing and exacerbate the weakness that we are already beginning to see in the EUR/USD and GBP/USD in the process.

What is the market expecting for April?

Change in Non-Farm Payrolls: 100k Forecast, 180k Previous
Unemployment Rate: 4.5% Forecast, 4.4% Previous
Change in Manufacturing Payrolls: -14k Forecast, -16k Previous
Average Hourly Earnings: 0.3% Forecast, 0.3% Previous
Average Weekly Hours: 33.8 Forecast, 33.9 Previous

The odds are in favor of a weaker NFP number, but there are arguments supporting both weaker and stronger job growth:

Arguments for Below 100k Non-Farm Payrolls

ADP Employment Index Adds The Fewest In Almost Four Years
Challenger Reports Sharp Increase in Layoffs
Hudson Employment Index Drops
Jobless Claims Mount

There are number of leading indicators for the non-farm payrolls report that we watch very closely and most of them paint a very grim picture of the labor market. First and foremost, the most recent ADP employment report added the fewest jobs in almost four years for the month of April as businesses look to cut investment spending on slower consumption forecasts. Although retail sales figures have been strong, consumer sentiment is dropping, and will likely lead to future slowdowns in demand and production. The details of the Beige book report already indicate that confidence in the current labor market conditions is dropping. Incidentally, most depressing are the results of the Hudson and Challenger surveys. Last month, Challenger Gray and Christmas reported an 18 percent increase in announced layoffs in the month April and a 44 percent increase in planned layoffs. These results are also in line with the increasing number of jobless claims. In the month of April, the 4 week moving average of jobless claims increased to 332k. This represents a significant jump from the 317k average that we saw last month as well as a return to February levels. Taking that information into context, we can estimate that non-farm payrolls will be much closer to the 113k reading that we saw in February than the 180k print in March. Throw in the lower than expected Hudson Employment report and its easy to see why NFPs could surprise to the downside. The index fell by 1.5 points to 107.5, but it is important to note that the results are still among the highest in the past year. Meanwhile, the non-farm payrolls derivatives auction is already forecasting an addition of only 88.8k jobs instead of the 100.3k seen earlier this week. Should we get a sub 100k print, expect the dollar to drop to fresh lows against the Euro.

Arguments for Above 100k Non-Farm Payrolls

ISM Manufacturing and Services Signals Stronger Job Growth
Strong Earnings Could Keep Hiring Steady
Monster.com Online Hiring Advances

Even though most of the leading indicators for payrolls are forecasting softer job growth, there is still a chance that we could see a dollar positive number. The forecast of 100k is considerably lower than Marchs 180k print. Most of the layoffs were concentrated in the financial sector with Citigroup to blame. Corporate earnings in other service sectors have been strong, which may not necessitate such a large deterioration in payrolls. In addition, both manufacturing and services seems to have gotten a lift from a depreciated dollar, which could boost near term hiring potential. The headline ISM manufacturing number reached the highest level since August of 2006 while the services number hit a 4 month high. Both surveys reported improvements in the employment components with the manufacturing sector moving back to job growth rather than job losses. With the US dollar still very week, improvements may very well continue deep into the summer months as companies prepare for fall inventory. Lastly, the Monster.com index posted a gain in the month April, indicating that the number of online job ads increased. Although the pace of growth has slowed, the positive print provides a glimmer of hope for those looking for more than 100k jobs.

Conclusion

Keep an eye on both the headline and revision number. The price action in the dollar indicates that the market has not yet priced in a weaker number. Instead, going into the NFP release, the dollar is stronger. This suggests that we could see a sharper reaction to a dollar bearish versus bullish number.

Synopsis: Given expectations of a poor NFP release, we could see a small surprise or upward revision force an immediate dollar rally. A strong April print and an unchanged or upwardly revised March figure would clearly be the most Greenback-bullish outcome, providing a signal to go short the EUR/USD on confirmation of a bearish reaction at 08:35 EST (12:35 GMT).

Richard Lee is a Currency Strategist at FXCM.