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• Canadian Dollar Sees Heavy Volatility after Employment Data Disappoints
• British Pound Rebounds vs. Euro, Japanese Yen as UK Producer Output Prices Rise
• Euro Takes a Beating as NFPs Trigger EURUSD Breakdown

US Dollar Rallies as NFPs Spur Optimism, Japanese Yen Flounders as S&P 500 Surges 1.3%
The US dollar rallied in response to news that US non-farm payrolls (NFPs) for the month of July fell by only 247,000, the least since August 2008. NFPs had been forecasted to fall by 325,000, and while the results still reflect the nineteenth straight month of job losses, they also show that the extent of the decline has been easing steadily since the start of the year. Adding to the positive news, the unemployment rate fell to 9.4 percent from 9.5 percent.

The US dollar's reaction was interesting in that we haven't seen fundamental forces drive the currency since June 5, which was the last time we saw a surprising strong NFP result, as the greenback has generally traded as a safe haven asset in recent months (gaining during times of risk aversion and stock market losses while losing at times of improved investor sentiment). This was primarily due to the fact that Treasuries responded so sharply to the news, with 10-year yields surging 10 basis points to 3.854 percent. A continuation of this dynamic bodes well for US dollar bulls, as US economic data has generally suggested that the contraction slowed during Q2.

Meanwhile, the JPY crosses haven't come close to losing their link with risk trends, as the Japanese yen was the weakest of the majors on Friday, plunging more than 2 percent against the New Zealand dollar and US dollar while falling over 1 percent versus the Canadian dollar, Australian dollar, and British pound. At the same time, the S&P 500 broke above key resistance at 1,008 and ended the day up 1.34 percent at 1010.48. While the divergence between the low-yielders is quite obvious today, we need more than one day of price action to call it for sure.

Looking ahead to next week, traders will be watching the release of the Federal Reserve's rate decision and US advance retail sales. On August 12, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, but the statement could spark heavy volatility if the FOMC announces an expansion of their QE efforts or an elimination of them. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher. On August 13, retail sales may rise by 0.5 percent for the month of July July, which would mark the third straight improvement and add to evidence that the economic recovery may be on the way.

Related Article: US Nonfarm Payrolls Report Sends Japanese Yen Lower - Why?

Canadian Dollar Sees Heavy Volatility after Employment Data Disappoints
The Canadian dollar fell against the US dollar and New Zealand dollar, but gained against the rest of the majors, after Canadian data proved to be very disappointing. Indeed, USD/CAD surged about 75 point in a matter of 2 minutes after data showed that the net employment change fell by 44,500 during July, compared to a drop of 7,400 in June and expectations for a decrease of 17,500. However, with the participation rate slipping to 67.2 percent from 67.5 percent, the unemployment rate actually held steady at 8.6 percent. Later in the morning, the Ivey Purchasing Managers Index (PMI) also fell more than forecasted, to 51.8 in July from 58.2. Since 50 is the point of neutrality, the data indicates an expansion in activity once again, albeit at a slower pace. Meanwhile, the employment component of Ivey PMI fell back below 50 to 48.2, which is in line with the actual net employment change we saw at 7:00 ET.

British Pound Rebounds vs. Euro, Japanese Yen as UK Producer Output Prices Rise

The British pound rallied against the euro, Swiss franc, and Japanese yen on Friday, recouping some of the losses accumulated on Thursday after the Bank of England announced that they decided to expand their quantitative easing (QE) program. However, the currency continued to rack up losses against the ultra-strong US dollar, as GBPUSD tumbled for a test of the June 3 high of 1.6662. Looking to the UK data on hand, producer output prices unexpectedly rose in July at a rate of 0.3 percent while input prices declined 1.4 percent, suggesting that the recession may be easing enough for companies to charge customers more in an attempt to improve profit margins. Nevertheless, as mentioned yesterday, with the BOE adding to their QE program and the ECB striking a neutral tone, there appears to be fundamental upside potential for EURGBP.

Euro Takes a Beating as NFPs Trigger EURUSD Breakdown
The euro was one of the weakest major currencies on Friday, but it has little to do with European data. Instead, the release of US non-farm payrolls triggered a surge in the US dollar, which led EURUSD to break out of a tight range and down roughly 200 points. Next week, the euro will face very high event risk from the release of Q2 GDP. In 2008, the release of Euro-zone CPI drew significant attention and sparked major volatility for the euro. However, indicators of growth have become more important, as the European Central Bank has shifted its focus away from inflation and on to the global and regional economic slowdown. The advanced reading of Q2 GDP is forecasted to contract for the fifth straight quarter, this time at a rate of -0.5 percent, compared to -2.5 percent in Q1, while the year-over-year rate could fall by a record 5.1 percent. Such data would back up the ECB's recent claims that the pace of contraction is clearly slowing, and if GDP falls less than anticipated, the euro could rally. On the other hand, a worse-than-expected decline in Q2 GDP could weigh on the currency.

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