The NFP & Long-Term USD Price Action

Will this week’s non-farm payrolls release spark a long-term trend for the U.S. dollar? Here’s a quick recap of past price movement after the NFP:

USDX NFP Reaction

USDX NFP Reaction

Let’s break down the U.S. dollar’s reaction to the past three non-farm payrolls releases to see if there are any patterns that might be repeated this time.

Last year’s release of the November 2013 NFP figure yielded an unusual reaction from the U.S. dollar, as the currency sold off despite stronger than expected gains in hiring. The U.S. economy added 203K jobs then, higher than the estimated 200K increase, while the jobless rate improved from 7.3% to 7.0%. What you have to remember though is that the U.S. just came from a government shutdown at that time and analysts thought that the rebound in November hiring isn’t enough to make up for the previous 3-month streak of weaker than expected jobs growth.

This year’s release of the December 2013 NFP reading, which came in much weaker than expected at 74K versus the 196K estimate, revealed that the U.S. dollar was trading on fundamentals at that time. However, the dollar’s losses were erased in the latter half of January as market watchers became convinced that the hiring setback was simply a result of extreme weather conditions.

Last month’s release of the January 2014 NFP report though showed that the effect of the cold weather in the U.S. was much worse than anticipated. The report churned out another weaker than expected result of 113K instead of the projected 185K increase, yet the jobless rate ticked down from 6.7% to 6.6%. By this time, analysts knew better and took the “improvement” in the unemployment rate with a grain of salt, knowing that it was merely spurred by a lower participation rate. With that, the U.S. dollar suffered a deeper selloff and crashed below a psychologically significant level.

Amidst all this, Fed Chairperson Yellen has assured markets that the weakness in hiring is all just weather-related. The upcoming NFP release could confirm if the cold snap is still taking its toll on the U.S. labor market, with analysts projecting a stronger NFP reading of 151K compared to the previous figures.

Another weaker than expected release would mark three consecutive months of bleak hiring conditions, which might push the U.S. dollar index below another psychological support level. On the other hand, a respectable gain of at least 200K could be enough to provide long-term support for the dollar, as it could convince traders that the Fed will carry on with its taper plan.

Based on the clues from this week’s set of U.S. reports, it is likely that Friday’s NFP release might disappoint. The ADP non-farm employment figure fell short of expectations while the previous month’s figure was revised lower. In addition, the ISM non-manufacturing PMI’s jobs component chalked up its first contractionary reading in two years as it fell to its lowest level since March 2010.

Do you think the February NFP will come up short? Cast your votes in our poll below!