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• Commodity Dollars Lead the Way as Canadian Economy Unexpectedly Adds Jobs, Carry Trades Surge
• Euro Mostly Weaker as Comments from ECB's Trichet Reiterate Neutral Stance
• British Pound Still in Consolidation Mode

US Dollar, Japanese Yen Dive as Equities Rally in Response to Smallest Drop in Non-Farm Payrolls in a Year
Increased risk appetite ruled the trading day after US unemployment data fell into two ends of the spectrum: surprisingly optimistic and deeply disappointing. Starting with the good news, non-farm payrolls (NFPs) fell by 216,000 in August, which was less than forecasts for a drop of 230,000 and the slowest pace of job losses in a year. At the same time, though, the unemployment rate jumped beyond forecasts to 9.7 percent - the highest since 1983 - from 9.4 percent. The hour after the release consisted of extremely choppy price action across the majors, but then the US dollar and Japanese yen went one direction as the DJIA and S&P 500 surged: down.

A breakdown of the overall NFP report shows divergence from leading indicators going in to the release, as the number of job losses in the manufacturing sector increased to 63,000 from 43,000 despite the rise in ISM manufacturing during the same period, which actually reflected an expansion in business activity for the first time in nineteen months. On the other hand, service-providing employment fell by 80,000 in August, compared to a decline of 154,000 in July and 251,000 in June. At the end of the day, the surge in the unemployment rate tells us that the US economy is still struggling to gain traction, despite proclamations that the recession has ended, and as long as jobless claims are rising, there will be little impetus for consumption - which makes up more than 70 percent of GDP - to improve.

With US markets closed on Monday for the Labor Day holiday, volumes should remain fairly thin until the start of European trading on Tuesday. At that point, potential for breakouts from the summer trading ranges will rise substantially. That said, Friday's price action showed that risk trends are still driving moves for the low-yielding US dollar and Japanese yen, and this is likely to remain the case throughout next week as the US economic calendar will be fairly light.

Related Article: US Dollar May Finally See Break from Summer Ranges as Liquidity Returns

Commodity Dollars Lead the Way as Canadian Economy Unexpectedly Adds Jobs, Carry Trades Surge

The Canadian dollar, New Zealand dollar, and Australian dollar were the strongest majors of the day as risk appetite surged and pushed carry trades higher. Meanwhile, the Canadian dollar also had some strong fundamental forces backing it up, as the net employment change for the nation surprisingly rose by 27,100 during August, beating forecasts for a decline of 44,500. While this did not prevent the unemployment rate from rising to 8.7 percent from 8.6 percent, the markets showed a clear preference for the net change. As one of the timeliest indicators of the health of the Canadian economy, the data suggests the Bank of Canada's upcoming policy meeting could yield an optimistic statement next Thursday.

The New Zealand dollar will also face a rate decision next week, and the Reserve Bank of New Zealand (RBNZ) is anticipated to leave the Official Cash Rate target unchanged for the third straight meeting at 2.50 percent on Wednesday. In RBNZ Governor Alan Bollard's last policy statement, he sounded extremely cautious on the outlook for the economy, especially because the strength of the New Zealand dollar had created additional risks. Where the New Zealand dollar ends the trading day will likely have to do with the status of one statement though: the final portion. We also saw in the last policy statement that the RBNZ maintained that it was appropriate to continue to provide substantial monetary policy stimulus to the economy and that the central bank could still lower rates modestly during the coming quarters as they continue to expect to keep the OCR at or below the current level through until the latter part of 2010. If the RBNZ eliminates the phrase noting that they could still lower rates, the New Zealand dollar is likely to surge in anticipation of rate hikes down the line. On the other hand, if the RBNZ maintains their dovish-neutral tone, the currency could slip.

Euro Mostly Weaker as Comments from ECB's Trichet Reiterate Neutral Stance

The euro gained against the ultra-weak US dollar and Japanese yen, but that was about it, as the currency fell against the rest of the majors. There was no key data on hand, but the euro did have to contend with decidedly neutral comments from European Central Bank President Jean-Claude Trichet, who said that the bank won't necessarily raise interest rates once they start unwinding their non-standard policy measures. ECB Governing Council member Juergen Stark added that the extraordinary efforts will be withdrawn as soon as upside risks to price stability emerge, but with annual rates of CPI growth still negative and well below the ECB's 2 percent target, it may be a very long time before this even becomes an issue.

British Pound Still in Consolidation Mode

The British pound remains widely range bound, and with no data on hand for the day, the currency mostly gained in line with other risky assets. The currency could stay range bound next week as well, despite the fact the Bank of England will be meeting. The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but the market-moving part of the announcement is usually the policy statement. This has consistently been the case throughout the past year, including last month, when the BOE unexpectedly announced a £50 billion expansion to their quantitative easing program that would likely come to an end in early November. That said, with no expansion anticipated, the statement is likely to just be a straightforward announcement offering little insight, and thus, the British pound shouldn't show much of a reaction.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com