· Treasury Secretary Paulson Graces The Dollar<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· Yen loses steam on rumors that BoJ to stand pat through December meeting
· Next weeks <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK inflation data will prove critical to GBP strength
US Dollar
As we said yesterday, Fridays economic indicators would assess whether volatility had truly returned to the FX market. For those looking for trading opportunities in a more active market, the results didnt disappoint. A consistently top ranked market-moving indicator, todays NFPs built pressure behind the dollar; but the initial reaction was muddled. Payrolls through the month of November grew 132,000 heads, which was both better than expected and far above the previous months read. This headline number, on the other hand, was tainted by a revision in Octobers figure from 92,000 to 79,000. Whats more, in comparison to the average payroll additions in the first half of the year, this was a modest improvement. The same mixed sentiment was present in the remaining statistics of the labor report. Average hourly earnings for the month rebounded to a 4.2 percent annual pace of expansion, while the jobless rate countered by stepping up to 4.5 percent. Taking a deeper look into the employment numbers broken down by sector, the same offsetting sentiment was seen. So, from all angles, the labor numbers could have been regarded as the average print. However, these numbers were not taken in isolation; and it was the contrast drawn against preconceived dollar pessimism that helped to sow the seeds of a rally. With fears over the economy heading for a hard landing prevailing over the dollar, todays employment and wage numbers helped alleviate the pressure while diverting expectations for a Fed rate cut by the first quarter of 2007. With this underlying optimism lying in wait, all that was needed was a trigger. Enter Treasury Secretary Henry Paulson who sparked the rally when he offered his opinion that todays employment numbers were good news and provided evidence economic growth was heading toward sustainable levels. On these comments the dollar entered a steep rally against most of its major pairs that easily measured over 100 points.
Euro and Swiss Franc
The Euro traded within its largest daily range since June, as completely unexpected reactions to the mornings NFP data pushed the single currency both sharply higher and lower through the day. Despite a stronger than expected US labor result, the Euro managed to retest recent 18-month highs?only to fall over 150 points in the trading that followed. When the dust had settled, dealers cited strong official buying interest as the main source of Euro strength following US data, with incredibly swift profit-taking leading the later tumble. It was fairly clear that traders had been extremely long the single currency, with recently released futures data showing the highest ever net long positioning on the EURUSD. Whether or not this sell-off can continue will likely depend on next weeks European inflation data, with outlook on ECB interest rates weighing in the balance. Much the same can be said for the Swiss Franc, with next weeks SNB meeting to dictate the likelihood of any further interest rate increases for Europes 8th largest economy.
British Pound
With no new economic data through the day, the Pound likewise traded completely off of dollar-based moves. Despite rallying to breach yesterdays highs, the previously unstoppable British Pound dipped to fresh weekly lows on the close. There was relatively little in terms of fundamental reasons for the Pounds declines, except to note that tonights Commitment of Traders report showed that Pound net longs fell on the week. Speculative bets on the GBPs continued appreciation fell off of record-highs, indicating that price action may have topped out in the short term. Of course, such a scenario will largely depend on the coming week of economic data, with government officials due to report on Consumer and Producer inflation through the month of November. Any negative surprises could certainly hamper any hopes of a continued Pound rally, as falling inflationary pressures would effectively rule out higher interest rates through the medium term.
Japanese Yen
In addition to trading off of broader dollar moves, the Yen posted pronounced drops on news that the Bank of Japan would not raise interest rates at its upcoming meeting. Japans JiJi newswire claimed an anonymous source saying that BoJ officials had no plans to raise borrowing costs through its December meeting. Likewise weighing on the Asian currency, government officials cut estimates of 2007 GDP growth and essentially bolstered the case for no upcoming rate hike. Given that the Yen has rallied on such expectations, it follows that it would subsequently lose ground if a hike did not materialize. Some analysts now claim that a rate change will likely take place through the first quarter of 2007. With synthetic rate forwards pricing in an increase through December, Yen bulls may lose faith and sell the currency if next weeks inflation data does not show impetus for a sooner change.
Commodity Currencies (CAD, AUD, NZD)
In a light day for commodity bloc scheduled releases, a heavily traded commodities market was more than enough to take up the reins for currency traders. Australia, which had only home loans and investment lending data for October on the docket, took its direction from gold. As Australia is the second largest producer of the precious metal, a 1.4 percent drop on the NYMEX to $625.15 per troy ounce wore on the expected value of exports. Though gold and the Aussie dollar enjoy a respectable correlation, the real raw material lead was between the Loonie and crude. Oil prices slipped 0.7 percent to $62.03 per barrel, wearing on the steady rebound energy bulls fought for over the previous two weeks. The hefty relationship these two assets enjoy was strong enough to overcome the tepid sentiment tied to the countrys only release; housing starts for November. New-home construction grew to 225,000 units, only 1,800 more than the previous month, but strong enough to suggest that the whole fourth quarter could contribute to economic growth in the final months.
