Monthly private-sector payroll data is due out Wednesday before the opening bell, and some strategists are watching the report closely for its potential ramifications on the currency market.
Sentiment toward the U.S. dollar has been quite negative this year. But it could turn more positive if the ADP payroll data — along with the quarterly GDP report, also due out Wednesday — shows strong results, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.
The relative value of the U.S. dollar has weakened substantially this year as the presidential administration's plans for tax reform have come into question, Treasury bond yields have tumbled and a slew of economic data has proved weak. The dollar index dropped to a 2½-year low in Tuesday trading.
The 108 mark in the dollar/yen relationship is the level Schlossberg is watching most in the currency markets. If the ADP data disappoints on Wednesday, and that line breaks to the downside, that suggests further suffering for the dollar's value relative to rival currencies. The dollar/yen was trading at 109.71 on Tuesday afternoon.
The results will also be critical in setting the "tone of trading" for the remainder of the week, Schlossberg wrote in an email to CNBC on Tuesday, as well as a gauge for the Federal Reserve's path for hiking interest rates.
"The ADP data is usually the earliest and best forecaster of the very important nonfarm payrolls, which are due on Friday," Schlossberg said on CNBC's "Trading Nation." "And because of that, the market is going to be watching that very keenly, especially since U.S. data is crucial to determining whether the Fed is going to raise rates in December or not," he said, pointing out that the market has been "skeptical" of the central bank raising rates in December.
Economists as a group are expecting the private sector to have created 184,000 jobs in August, according to FactSet estimates. The prior report, for the month of July, was broadly weak.
A reading of 200,000 or more could reverse some of the negative sentiment toward the U.S. dollar and spur a "short-covering rally in the deeply oversold buck," Schlossberg wrote in an email. He said it also could push 10-year Treasury yields higher and revive "the theme of U.S. growth and monetary policy normalization."
Of course, the key measure for the jobs market will be the nonfarm payrolls report, set to be released on Friday. Economists are expecting to learn that 180,000 jobs were created and that the unemployment rate will remain stable at 4.3 percent.