March employment report preview

U.S. March employment data will be released on Friday April 3 at 0830ET/1230GMT. The consensus forecast is for a drop in non far payrolls of 660K (prior -651K) and a rise in the unemployment rate from 8.1% to 8.5%. We expect to see a drop of 710K and a smaller increase in the unemployment rate to 8.4%. Negative revisions to prior period data may result in total payroll losses reported in March approaching 1 million. The market is clearly braced for a weak U.S. jobs report, but a rally in risk appetites is currently underway, though we note it is on little substantive fundamental improvement and primarily sentiment-based. As a result, the USD broke lower on Thursday and JPY-crosses rallied sharply. As often happens with employment releases, a market breakout will either be confirmed or denied after the report. We think a NFP drop of more than -750K and/or an increase in the unemployment rate to above 8.5% will be needed to rattle investor confidence and trigger profit-taking as risk aversion returns. An 'as expected' or 'better than expected' result is likely to be ignored, and may even be construed as the start of a plateau in layoffs, fueling further gains in sentiment and risk appetites. As always, revisions to prior months' data will be an important wild card. The USD is currently under pressure as risk appetites improve, and the JPY-crosses are similarly well-supported. A significantly weak NFP report may derail the current rally in risky assets and see the USD recover lost ground. But it is difficult to argue that dismal U.S. employment data represents a reason to buy USD, so the deck is clearly stacked against the USD. We would expect USD/JPY to take the biggest hit if the NFP surprises significantly to the downside (worse than -750K), while other USD pairs (e.g. EUR/USD, AUD/USD) will weaken slightly/gain less, as JPY-crosses are sold on a return to risk aversion. An as expected (-650K to -720K) or better than expected number (less than -650K) is likely to see the current risk rally extend gains further. In this case, we would expect to see USD/JPY fall less initially and likely recover quicker, and for other USD pairs to extend gains, as JPY-crosses move higher as risk sentiment holds steady and possibly improves. Overall, we will look at the NFP data for what it implies for risk appetites, closely watching how stock markets react, and trade the USD and JPY-crosses accordingly. Brian Dolan is chief currency strategist at FOREX.com