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By Mike Conlon | March 4, 2011

All eyes this morning are on the US Non-Farm Payrolls (NFP) report due out at 8:30AM EST. While this is always one of the most significant economic reports that will induce market volatility, it hasn’t been this anticipated for some time.

Last month’s NFP report was an outlier, in that the 36K jobs gains reported almost came with a notion of disbelief, as if it was a mistake of some sort. Bad weather was blamed for the disconnect; but the figure showed that only 36K jobs were created, yet the unemployment rate fell from 9.4% to 9%. As I said in last month’s NFP blog article, you can’t have the BLS without the BS!

So this month we are expecting there to be gains of 196K jobs, with the unemployment rate ticking slightly higher to 9.1%. Recent data of late has been better than expected, especially when considering that the ADP employment change showed better than expected gains on Wednesday, and initial jobless claims came in lower than expected on Thursday. “Only” 368K people lost jobs last week, beating the expectation of 395K losses.

So this number should be pretty good today then, right? I’m not so sure. As I mentioned last month, when everyone gets their hopes up so high for good numbers, they usually end up disappointed. There is no other news to rely on today, so this number will be critical.

Last month I offered a guess as to what the number would be, and will my prediction was correct that it was worse than expected, I couldn’t imagine how much worse it was. This month I think we may see more of the same. So my prediction (remember this is a guess and NOT a trade recommendation) is that we will see jobs gains of 112K, better than last month but missing expectations. I think this will somehow induce US dollar strength today, as the Dollar seems very oversold to me. Regardless of what happens, there will be major volatility as the market digests the data.

Speaking of volatility, who saw the crazy move on the Euro yesterday? It happened right around 8:30 and the talking heads tried to attribute it to the initial jobless claims numbers, but basically ECB head Trichet said that he could raise rates next month, sending the Euro higher to the tune of 150 pips. This also helped risk-taking as US stocks made tremendous gains.

Stocks and commodities are higher to start the morning, but will these gains continue? Stay tuned for NFP!

In the forex market:

Aussie (AUD): The Aussie is mostly lower this morning as Prime Minister Gillard said that Aussie strength “puts burdens” on some areas of the economy. In addition, a separate report cited Australia’s housing market as being in a tremendous bubble which could pose a risk to the economy.

Kiwi (NZD): The Kiwi is also lower as the International Monetary Fund (IMF) said it will likely cut it forecast of New Zealand’s growth as a result of the two earthquakes. The rate expectations for New Zealand actually show that a reduction may be coming before another hike. The Kiwi has had a tough week. (Click char to enlarge)

Loonie (CAD): The Loonie is mixed this morning as the tug of war between higher oil prices and Canada’s economic ties to the US battle for position.

Euro (EUR): Wow, what a move for the Euro yesterday. The ECB finally did issue the hawkish comments the market was waiting for, after about 45 minutes of hemming and hawing. Was that a timed announcement with US economic data at exactly 8:30AM? Let the conspiracy chatter begin! (Click chart to enlarge)

Pound (GBP): The Pound is mostly higher as rate expectations shrug off recent home price data that has showed declines.

Dollar (USD): The Dollar is actually trading higher this morning as despite the mild risk taking in the market: This “wait and see” approach should provide trading opportunities on the release of the NFP report.

Yen (JPY): The Yen is weaker across the board as it is still trading under expected risk themes.

Put up or shut up! There are no more excuses! The US needs to see jobs growth and today’s number will be critical. There are two competing arguments for the direction of the Dollar today.

The first argument says that if the number should come in better than expected, then the Dollar should rally higher as this means that the US economy is improving and Bernanke will have to move on rates sooner to combat inflation. If the number is worse, than it justifies his position of fragile recovery and the need for a weak Dollar.

The alternate argument is that a better than expected number while good for the economy, will cause Dollar weakness as Bernanke has been blind to the inflation story and will not pre-empt QE2 under any circumstance. This comes as just about everyone else around the globe is complaining about inflation.

I’m actually in the second the camp, but think that a worse than expected number will cause Dollar strength today (the opposite of the scenario I laid out above). However, I will not be taking positions before the release, as I always prefer to let the market tell me which way to go.

So I can envision a scenario where the number comes in worse than expected (see my guess above) and initially the Dollar trades lower, but then quickly rebounds and finishes the day higher. This feels like a “crescendo moment”, with a sharp price spike and major volatility to reverse recent Dollar weakness.

At least that’s what I hope will happen, otherwise the Dollar may be falling off of a cliff! See you at 8:30!

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