Dollar Rallies on the Relief that Mr. Frosty is to Blame

The U.S. dollar is trading sharply higher against the euro and Japanese Yen ahead of Friday's non-farm payrolls report. With the last 2 monetary policy decisions behind us, the NFP report will now have the market's undivided attention. No fireworks came out of the BoE and ECB rate decisions as U.K. policy makers left the tone of their monetary statement unchanged while the ECB announced additional measures to phase out excess liquidity. The euro failed to rally because the central bank remained very cautious on the economic outlook and downgraded their inflation forecasts.

For more on the BoE and ECB, read our Instant Insights on the Bank of England and European Central Bank rate decisions.

Blame it on Mr. Frosty

Jobless claims fell from 498k to 469k last week which confirms that Mr. Frosty was behind the increase - the drop in jobless claims brings us back to pre-snowstorm levels. Although many economists are looking for a sharp decline in payrolls tomorrow, traders will most likely downplay the weakness by attributing it to temporary layoffs in the weather-sensitive construction and transportation industries. Continuing claims also dropped from 4.63 million to 4.50 million which would have been encouraging if not for the fact that the number of people receiving extended benefits rose by 178.5k and emergency benefits rose by 207.6k. Therefore despite the drop in jobless claims, the labor market is still very weak. After getting rid of all their excess fat, companies have been reluctant to hire. Instead, the productivity data indicates that they are simply making their existing employees work harder.

Meanwhile factory orders rose 1.7 percent in January which was slightly worse than the market expected but orders in December was revised sharply higher from 1.0 to 1.5 percent. This indicates that the manufacturing sector is continuing to perform well butthe housing market is showing pockets of weakness with pending home sales falling by 7.6 percent. The renewal of the tax credit appears to not be having much of an impact on demand.