Will The US Dollar Strengthen On Non-Farm Payroll Data?

Non-Farm Payroll ReportRecently, we’ve seen all eyes on United States economic data. After all, strong data could mean higher interest rates very soon; while weak data could mean a troubling outlook for the United States economy. Nonetheless, the overall opinion seems to be that investors are expecting the non-farm payroll data to bring good news. Today we’ll go over why investors are expecting strong data to be released Friday, where the US dollar is now, what strong data could mean for the currency, and how a strong report could turn out to be a bad thing overall.

Why Are Investors Expecting A Strong Non-Farm Payroll Report?

Non-farm payroll data has been know to be positively correlated to US labor market data, and other data points. So far, everything we’ve seen points to strong expectations for Friday’s non-farm payroll data.

With the US labor market in mind, jobless claims numbers rose less than expected last week. In the week ending January 31st, new claims for state unemployment benefits rose 11,000 to 278,000 (seasonally adjusted). Prior to the report, economists forecast an increase to 290,000.

All Correlations Aside

Even if we take away all data points that have correlated positively with non-farm payroll data in the past out of the equation, there are other signs pointing to strong expectations. For example, over the past 12 months, average non-farm payroll gains have been incredibly high. At an average rate of 223,480, this is the strongest rate of growth we’ve seen since 1998. So, all in all, we would generally expect this strong trend to continue.

What Will Strong Data Do To The Value Of The Dollar?

With so many signs pointing to a positive report, forex trading experts are doing all they can to keep their mouths from watering. That’s because experts know that strong data means gains! At this point, there is no reason to expect a poor report. So, with positive data just over the horizons, most are expecting the US dollar to increase in value.

Will Positive Data Be Good News Or Bad News In The Long Run?

In the short run, positive data will definitely be positive for the United States economy. In the long run on the other hand, this may be bad news. I know that it may be hard to fathom the idea of positive data being bad news, but overall, we’ve already started to see the negative side effects of a strong dollar. Here are a couple of reasons that positive data may prove to be a bad thing for the US economy overall…

  • A Strong United States Dollar Isn’t Always A Good Thing – As mentioned above, we’ve already seen the beginning side effects of a United States dollar that is starting to grow too fast. With poor economic conditions around the world, other currencies around the world are losing value. Because the dollar is gaining value and these other currencies are losing, consumers in other nations are experiencing higher costs for American made goods. As a result, we’re starting to see a bit of a decline in foreign trade.
  • Think About Interest Rates – Currently, the Federal Reserve’s interest rates are low as the result of an attempt to stimulate the economy. If too much positive news comes out too quickly, the Federal Reserve may be prompted to raise interest rates earlier than they should. This is the same thing that has harmed the United States economy in the past!

Final Thoughts
While I do think we’re going to see positive data Friday and I agree that it will be good news for the short term, in the long run, I’m starting to grow more and more concerned over foreign trade and interest rates. With the economic data being overwhelmingly positive, I think that we can expect the Federal Reserve to move more quickly with regard to interest rates. Also, it’s important to remember that no economy can grow on a long term level without strong foreign trade. If the United States dollar continues to grow too quickly and other currencies continue to lose value, I fear what we could see in foreign trade moving forward.

What Are Your Thoughts?

Do you think we’re going to see positive non-farm payroll data? How do you think the dollar will react to the news? Finally, are you concerned about long term economic trends? Let me know in the comments below!

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