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As we countdown to non-farm payrolls, the price action of the U.S. dollar suggests that traders are banking on positive job growth last month.  The greenback is trading higher against Japanese Yen and British pound.  This optimistic sentiment is not necessarily misplaced considering that this morning's leading indicators for non-farm payrolls all point to a further improvement in the labor market.  

According to the Challenger Report, there was a marginal decrease in layoffs in December, a smaller decline in private sector payrolls and an increase in the employment component of service sector ISM.  Although the ADP release has been a poor predictor of non-farm payrolls on an absolute basis, it is a good directionally.  The employment component of service sector ISM rose from 41.6 to 44.0 which indicates that job losses are moderating.  Although the index is still in contractionary territory, since the start of the ISM report, there have been 4 months where NFPs printed positive even though the employment component of service sector ISM was below 50 (see chart below).

 

The ISM non-manufacturing index rose from 48.7 to 50.1, putting service sector activity back into expansionary territory.  Although the increase was less than the market had anticipated, any negative impact on the dollar should be limited since traders are relieved by the expansion in the service sector and the increase in the employment of the ISM report. However looking beyond payrolls, it is important to realize that the details of the ISM report reveal pockets of weakness.  For example, the new orders and export orders components decreased along with inventory sentiment which suggests that the pace of improvement in the U.S. economy could be slowing. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

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