The next 24 hours will be an exceptionally busy one for the financial markets. The latest trade numbers are due from China along with US and Canadian employment reports. The greenback extended its gains on Thursday against all of the major currencies, touching 110 versus the Japanese Yen in the process. The Dow Jones Industrial Average climbed to fresh record highs as equities rose for the fourth consecutive day. Strong earnings combined with an announcement from China that they will reduce tariffs on a $75 billion worth of US imports allowed animal spirits to seize US assets. Investors expect non-farm payrolls to be strong as Federal Reserve Presidents downplay coronavirus impact. Earlier this week, San Francisco Fed’s Daly said he doesn’t see the virus having a material impact on the US economy and this sentiment was echoed by Dallas Fed President Kaplan.

When trading non-farm payrolls, market sentiment plays a major role in how investors respond. The recent rally in the greenback and rise in stocks tell us that investors like the US dollar. They’ve shrugged off all coronavirus concerns in favor of good data and steady monetary policy. Tomorrow, the jobs report is expected to show improvement in the US economy. Economists are looking for non-farm payrolls to rise by 165K, up from 145K in December. The unemployment rate should be unchanged but average hourly earnings growth could accelerate to 0.3% from 0.1%.

Taking a look at the arguments in favor of stronger or weaker payrolls, most signs point to a healthy report. ADP reported near doubling of private payrolls growth last month and jobless claims continue to fall. One red flag is the labor component of non-manufacturing ISM, which measures hiring in the service sector, fell to a four-month low in January. This highly correlated report suggests that while NFP growth should be around expectations, it may not be a blowout number.

Arguments in favor of stronger payrolls

1. ADP employment change at 291K vs. 157K previous month
2. Employment component of manufacturing ISM ticks up slightly
3. 4-week jobless claims drops to 211K from 224K
4. Continuing claims falls to 1.751M from 1.80M
5. University of Michigan sentiment index hits 8-month highs
6. Conference Board Consumer Confidence index hits 5-month highs

Arguments in favor of weaker payrolls

1. Employment component of non-manufacturing ISM drops to 4-month lows
2. Challenger reports 27.8% increase in layoffs

How to Trade NFP

With that said, a good report should have a bigger impact on currencies than a weak one. If non-farm payrolls rise by 160K or more AND wage growth accelerates by 0.3% or better, USD/JPY will hit 110.50 and EUR/USD will sink below 1.0950. If payrolls miss but is above 135K and wage growth is 0.3%, any dips in the dollar could be bought as the rally is likely to continue. The same could be said if payrolls rise by 160K or better and wage growth is 0.2%. However if fewer than 135K jobs are created AND wage growth is 0.2% or lower, dollar bulls will lose control. At the end of the day, unless the jobs report is abysmal with NFP below 100K and wages at 0.1% or worse, the impact on Fed policy will be limited. In this case, market sentiment will have a bigger role in the dollar’s performance and given how investors drove the greenback higher into NFPs, it could take a major disappointment to halt the rally.

Market sentiment will also be affected by China’s trade report. If exports and imports fall more than expected, leading to a deeper contraction in the trade surplus, high beta currencies like the Australian and New Zealand dollars could extend their slide on concerns about the extent of the slowdown in China’s economy. It will also affect risk appetite and how currencies trade ahead of the non-farm payrolls report. For Canada, IVEY PMI and the January jobs report will determine whether USD/CAD breaks or fails at 1.33. The pair has been hovering not far from its 2-month high throughout the week and is clearly waiting for the jobs number for direction.