Currency Markets Digest The Non-Farm Payroll Report

Includes: FXE, UDN, UUP
by: Ralph Shell

Once again, the U.S. Labor Department delivers a surprise in the most recent NFP report. Following last month's low number, the experts all reduced their guesses for the new report and, of course, the number 165K new hires exceeds all expectations.The unemployment rate slipped to 7.5%, and the NFP from last month was revised upward from 88K to 138K. Perhaps these numbers confirm the reductions in the first time unemployment claims, which suggested the soft U.S. economic data was not right.

Equity markets are elated with the trend of new job creation. The S&P 500 raced through the 1600 handle to 1618 at this time, a new record high. Flush with access to the liquidity provided, courtesy of Bernanke & Co., the brokers and investment bankers are enjoying the day. Best to enjoy the moment, because every good report takes us closer to the day when the Fed will start to tighten. Then again, with so much money out there sloshing around, and Fed members like Yellen and Evans, this is not a concern.

The USD rallied against the yen, euro and the pound, but the rally failed to hold in the two European currencies. The euro sold off to 1.3035 and then quickly reversed to the topside, up almost 120 pips. The trading volume at the CME yesterday was quite heavy in the euro, 440K contracts twice the open volume of only 220K. This market, (EURUSD FXE) acts like there is major buying in the 1.30-1,31 area, but the weekly chart does not suggest we are headed higher.

The trading pattern in the pound was quite similar to the euro. Despite the friendly USD labor number, the pound has rallied back and currently at 1.5570 is higher then when the report was released. The open interest in the futures contract remains large, which suggests the big spec short in the pound remains. In the weekly chart, the channel to higher prices remains in place.

The yen is trading differently from the two European currencies. When the NFP came out, the yen weakened as the USD shot up from 98 to 99.25, and it is still trading around the 99 handle at 1630 Dublin time. Looking at the weekly chart, the sharp uptrend remains in place, however, it had stalled as we meander sideways close to 99.

There is news besides the NFP report today. The Bank of Canada appointed a replacement for Carney, who is headed to the Bank of England. Stephen Poloz is their new chief banker, and some people think this:

"may signal a weaker currency and lower borrowing costs as the world's 11th-largest economy looks to exports to revive growth."

Continuing in The Financial Post:

"He's historically a trade guy so he may favor a weaker Canadian dollar to favor exporters," Jonathan Lemco, senior sovereign-debt analyst at Valley Forge, Pennsylvania-based Vanguard Group Inc., the largest provider of U.S. bond funds, said in a telephone interview."

Yesterday we suggested buying the A$ and selling the C$. This could be an additional reason for the trade. There are some meaningful Australian reports early next week. On Monday, there is Australian retail sales, and on Tuesday, we get the trade balance and later the interest rate decision. The Reserve Bank of Australia Governor Glen Stevens has been reluctant to reduce rates, however, the 3% rate may be attracting too many fresh new yen and USDs. That money must go somewhere. Perhaps the reports will give us a buying opportunity. Yesterday's 1.0302 looks like it may hold. As always, mind your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.