Strong ADP, weak claims – which way will the payrolls go?

The most important release for the forex market and one of the most crucial for financial markets as a whole – the employment report from the US – is scheduled for 8.30 ET/14.30 CET today.  Without an acceleration in employment a recent uptick in US yields cannot continues and with the FED’s current attitude stronger payrolls numbers are the only chance for a stronger dollar. Last month the government report was disappointing (especially in light of stunning ADP) and that was one of the reasons for a relatively weak dollar in January.

This time the markets do not expect a turnaround but there are grounds for a moderate optimism. The ADP report was strong – the 3-month average shows +177k of new jobs in the private sector. The faster growth of employment is also observed in industry and in services as shown by ISM subindices. However, this is toned down by weaker claims numbers - the number of new registrations rose in January in comparison to December. If not the claims, there would be a chance for a +200k reading, what would be considered clearly positive for the dollar. Meanwhile the consensus is at +140k, even if the market may hope for a slightly better report as shown by the market interest rates inching up since Tuesday.

EURUSD – euro tumbles on rates

As we mentioned yesterday in the snapshot market interest rates for the euro did reveal unrealistic expectations regarding the tightening process in the zone. A recent surge in market yields looked as if the investors totally forgot about unsolved problems with debt crisis and economic stagnation in the South. Trichet could have talked about inflation, but in order to maintain the hype he would need to clearly suggest the rise of the ECB’s interest rates in the near future. Yesterday FRA 18x24 spread between the euro and the dollar declined by a massive 22bp as investors were withdrawing their aggressive bets on tightening in the euro. This process may be not a one day phenomenon. With the rates hype gone, investors may soon find the debt crisis still present which would take away some recent gains from the euro.

Technically, the pair broke through a lower bound of the upward channel which accelerated a decline and put a serious question on the recent upward trend. The pair remains above the key support zone of 1,3540/70 and should it move below, one can eye even 1,3240.

Events to watch – Payrolls in the US and Canada

The US payrolls report (8.30 ET, 14.30 CET, consensus +140k) is the most anticipated figure today as it may influence the forex market for the weeks to come. It will overshadow Canadian data: a similar payrolls report (7.00 ET, 13.00 CET, consensus +15k) and the PMI (10.00 ET, 16.00 CET, consensus 53 pts.).

Przemysław Kwiecień PhD, Chief Economist

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