Analysts have mostly raised their expectations leading up to the monthly US employment report for February on Friday afternoon.

Not so clear however is what affect a strong report would have on the US dollar even though the consensus appears to leans towards a bullish greenback.

Expectations raised ahead of Non-Farm Payrolls

Non-farm payrolls (NFPs) are forecast to have risen by 165,000 compared to 157,000 in January while the unemployment rate is expected to remain at 7.9% as disappointed workers return to the labour force.

Nonetheless, many analysts expect a better performance, especially after a better-than-expected ADP payroll report was released on Wednesday.

In fact, analysts at Unicredit see NFPs increasing by 175k.

Ahead of the data, Crédit Agricole strategists said that they "expect the jobs report to come in better than expected, as recent data, including the ADP employment report, suggest an overall positive month for the US labour market."

The KBC Market Research Desk said: "Overall, we believe that the risk is for a stronger outcome as the confidence indicators suggested that the economic climate has improved further during the month, while continued fiscal uncertainty apparently had no impact.

"Also the January outcome might be upwardly revised, brightening the overall picture of the report. The unemployment rate is expected to stay unchanged at 7.9% in February, after having increased in January. Also for the unemployment rate, we believe that the risk is for a more positive (lower) outcome."

So while the consensus surveys show NFP gains of around 160-165k, actual expectations have shifted higher. But while some analysts expect a strong report to be bullish for the dollar, others think otherwise.

High NFPs = Bullish dollar?

One side of the argument says that a strong jobs report may boost the greenback as a result of the positive correlation with solid US economic data. Recently, the dollar has benefited from positive economic data.

IG Markets Chief Market Strategist Chris Weston pointed out that the dollar has gained recently along with US stock markets, which he said "solidifies our theory that the US dollar is becoming an asset/investment currency — this could hold true again today."

Doubts remains over the strength of the correlation between the dollar and economic data. The 'textbook' reaction would be for positive data to be positive for the underlying currency but that has not always been the case for the dollar.

Kasper Kirkegaard of Danske Bank A/S said: "Expectations have risen ahead of today's NFPs, but we would still expect a high number to be dollar positive. This correlation is volatile, but it is usually going out of a market 'stress period' that positive US data surprises leads to a higher EUR/USD. There has not been that much stress in the system recently and the main scenario must be a 'textbook' reaction on the market."

Another argument for a positive dollar is that a strong jobs report would likely encourage the Federal Reserve (Fed) to take on a more hawkish tone and consider winding down the quantitative easing.

"Forecasts for a faster rate of job growth instill a bullish outlook for the greenback, and a positive print may pave the way for a long US dollar trade as market participants scale back bets for more quantitative easing," said David Song, currency analyst for DailyFx.

Alin Puian of Instutrade made the same case: "The US dollar advanced to the highest level in 3.5 years versus the yen on speculation an improving labour market will compel the Federal Reserve to slow stimulus even as Japan pledges to extend easing policies. Demand for the dollar increased before a report that may show US employers added more jobs in February."

High NFPs = Risk appetite = Bearish dollar?

On the other hand, other analysts say that markets are regaining their risk appetite, which tends to be bearish for the dollar. A positive report should further boost risk appetite.

According to DailyFx currency strategist Ilya Spivak, "The US Dollar and Japanese Yen are likely to fall if February's US jobs report tops expectations, boosting risk appetite across financial markets."

Similarly, Unicredit said: "Solid US labour data today could offer risk takers a further boost after steady central banks yesterday induced a gradual resumption of 'risk-on' across markets. The USD and the JPY could thus suffer further."



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