The US dollar sold off sharply on Thursday dropping to its weakest level against the Japanese Yen since September 2019. The greenback also resumed its rise versus euro and sterling with EUR/USD knocking on 1.12’s door. Its been a brutal week for the greenback in general as the trade weighted Dollar Index drops more than 3% from its February high. A large part of the decline can be attributed to the Federal Reserve who sparked speculation of a rate cut last week and followed through with a 50bp move on Tuesday. While the market is pricing in further easing in April, some investors are holding out hope that Friday’s non-farm payrolls report could save the dollar.

Traditionally non-farm payrolls is an exceptionally market moving report that could easily change the outlook for a currency but in this case, its unlikely. Economists are looking for job growth and wage growth to slow. In light of the market’s current attitude towards the US dollar and the nearly 1,000 point sell-off in stocks a weak report should have a bigger impact on the greenback than a strong one. Reason being, investors will see a soft number as justification for further easing by the Federal Reserve. A strong number on the other hand will be dismissed as being delayed and not reflecting the true impact of coronavirus. Although more indicators favor a strong report than a weak one (as shown below), any initial rally from a good number should fade quickly. USD/JPY dropped below 106.50 and could head towards 105 if NFPs disappoint.

We’re still waiting for the European Central Bank to announce easing which would kill the rally in euro but for the time being as they have not come forward, if NFPs miss, 1.1300 should be next stop for EUR/USD.

Arguments in favor of stronger payrolls

1. Employment Component of Non-Manufacturing ISM Rises to 55.6 from 53.1
2. Challenger Reports -26.3% in Layoffs
3. Conference Board Consumer Confidence Index Rises to 130.7 from 130.4
4. University of Michigan Consumer Sentiment Index Rises to 101 from 99.8
5. Employment Component of Manufacturing Rises to 46.9 from 46.6

Arguments in favor of weaker payrolls

1. ADP Reports 183K in Private Payrolls vs. 209K Prior
2. 4 Week Moving Average Rises Slightly to 213K from 212K
3. Continuing Claims Rise to 1.729M from 1.701M

USD/CAD could also hit 8 month highs if Canadian labor data falls short of expectations. Throughout 2019 Canada’s labor market has been on fire. Even the last report was good with more than 34K jobs added in the month of February. However, the Bank of Canada felt that it was necessary to lower interest rates by 50bp this week with BoC Governor Poloz adding that rate cuts can help consumer confidence. Considering the general strength of recent Canadian data, we can’t help but wonder if their decision to ease aggressively was motivated by weakness in incoming data that will be revealed in Friday’s employment and IVEY PMI reports.x