We expect non-farm payrolls to have risen by 80K in September following a loss of 4K jobs in August, along with a rise a in the unemployment rate to 4.8% from 4.7% and the average hourly earnings to remain unchanged at 0.3%.  Consensus forecasts expect a rise of 100K in payrolls and a steady unemployment rate at 4.7%.  The expected rebound in payrolls is mainly seen occurring in government and education jobs. Government jobs had shown a loss in the last 3 monthly releases, the longest string of monthly losses since March-May 2--3 when the Fed was in a midst of an extended easing campaign. We also expect September payrolls to be revised to a worse figure in the neighborhood of -20K.

The main reason for expecting a slightly lower payrolls figure than the consensus owes to our assessment of a protracted weakening in the establishment data of the BLS, which had cemented a weak trend in prior months. After growing by 122K and 188K in April and May, payrolls slowed to 69K and 69K in June and July. Thus, 6 out of the 8 months on record this year had fallen below their 3-month average.

Rising unemployment to matter more than rising payrolls

The unemployment rate should play an important factor in determining the market reaction to today’s report. Since the unemployment rate is the number of reported unemployed people divided by the civilian labor force (denominator), and since the labor force has fallen by a sharp 340K, we expect the labor force pool to have stabilized, thereby resulting into an actual increase in the unemployment rate to 4.8% from 4.7%, which would be the highest rate since July 2006.

The 9:10 am speech by Fed Board Governor Donald Kohn on the economic outlook should also be of interest.

Euro’s short-term bias remains negative

Yesterday’s press conference by ECB’s Trichet was a stark reminder that the bank’s underlying concerns remain that of inflation despite acknowledging potential growth risks to the downside. But the emerging developments in EURUSD chart pattern suggests further renewed downside towards the 1.4050 and possibly 1.400 later next week before stability ensues. It is crucial to establish that the ECB’s persistent inflation vigilance in the face of European politician protests and upside surprise data figures will lead to bottom fishing and buying on the dips in a currency that is not only increasingly serving as a viable alternative to the US dollar, but whose fundamentals are not handicapped by a negative interest rate outlook.

In the event of a payrolls figure greater than 100K and an unemployment rate of less than 4.8%, we’d expect the single currency to breach below the 1.4090 support targeting the 1.4050 foundation. A rise in the unemployment rate to 4.8% is likely to offset the reaction effect of payrolls greater than 100K and maintain the pair underpinned atop the 1.41 figure. Upside capped at the 1.4150 trend line resistance.

Loonie Soars to 98.60 cents as unemployment hits 33-year low below 6.0%

More validation for the strengthening loonie as Canada’s unemployment dips to 5.9% in September from August’s 6.0%, the lowest level since November 1974.  Employment rose by 51.5K versus expectations of 16K following August’s 23K. Despite gains of 60.7K in the services industry, there were more losses in manufacturing at -3.2K.

USDCAD hits fresh 31-year lows at 98.60 cents, and is expected to extend losses towards 97.80 in the event of a negative showing in US NFP. CAD gains will be curtailed in the event of a strong NFP, but USDCAD seen capped at 99.60.

We continue to favor the CAD against GBP, EUR and JPY.

USDJPY consolidation to continue

USDJPY displayed only a modest retreat on Thursday when the hawkish ECB conference and bigger than expected decline in US factory orders weighed on all USD pairs. Standing firm at above the 116.30, the pair is set for a considerable break out in the event of positive NFP surprise. Upside break out seen testing 116.85 in the event of +199 payrolls and unemployment rate less than 4.8%. A 4.8% jobless rate is seen imposing downside pressure at 116.50, while sub 80K payrolls to extend losses towards 115.80.

More uncertainty for the pound

The latest in the deteriorating news flow from the UK are remarks from Chancellor Darling warning that US sub-prime mortgage lending crisis will undoubtedly have a negative impact on Britain's economy, which will likely lead to a reduction in the government growth projections of 2.5%-3.0%next year. The projections will be made at next week’s Pre-budget report. Whether the BoE will cut interest rates this year and whether PM Brown will call a snap election are some of the lingering questions adding to the uncertainty surrounding sterling fundamentals.

Yesterday’s release of the Halifax House price index showed a 0.6% decline in the month ending in September, posting its first decline since December of last year. The latest figures on mortgage loans and the RICS price index are also serving as the latest empirical evidence against further rate hikes. More importantly, with inflation at 1.8% -- well below the 2.0% mandated target -- we expect a rate cut to take place as early as the November 6 MPC meeting once the BoE has prepared its quarterly inflation report due for release one week after the November MPC announcement.  With CPI falling well below the 2.0% target, the BoE inflation report is likely to change its 2-year outlook in favor of price growth meeting the 2.0% target.

Downside targets $2.0330, followed by 2.0280. Downside surprise in NFP to call up 2.0450.