US Dollar: Why Wasn’t There a Reaction to Non-Farm Payrolls?
The non-farm payrolls report is generally the most market moving indicator for the US dollar. Yet despite sharp intraday volatility, the dollar ended the US trading session not far from where hovered prior to the payrolls release. Although some could argue that this may be due to the lack of a surprise in the headline number, this observation is incorrect because the revision to the August number was substantial. Having originally reported that the US economy gave back 4k jobs, we now learned that 89k jobs were actually created during the month of August. In September 110k jobs were added to corporate payrolls. This revision highlights the inaccuracy of the monthly payrolls report which was further confirmed by the fact that the Labor Market plans to revise down payrolls for the 12 months ended in March 2007 by 297k. With the validity of the report in question, the price action in the dollar suggests confusion among traders. With Monday being a holiday in Japan and a semi-holiday in the US (at least for the bond markets), position squaring seemed to be the market’s preferred action. For those looking for more clarity, take a look at the bond markets. Yields are up across the board indicating that the bond traders believe that the payrolls number significantly reduces the chance that the Federal Reserve will continue lowering interest rates. Fed fund futures have gone from pricing in the possibility of 2 rate cuts this year to only one by Christmas. The odds that the Fed will lower rates at the end of this month are now fifty-fifty. Usually the reaction in the bond markets is the most accurate, which is why the US dollar could bounce once traders return from their holidays. Equity traders are also happy that the US economy is not in as much as trouble as initially anticipated. Next week, we will get a better sense of whether the worst is really behind us with retail sales and producer prices due for release. The trade balance and business inventories are also expected; the weak dollar should help to narrow the trade deficit.

Australian and Canadian Dollars Climb to Fresh Multi-Decade Highs
The return of risk appetite has driven the Australian and Canadian dollars to fresh multi-decade highs. For the past few weeks, the Australian dollar has been making new 18-year highs, but today, the currency took out its 23-year high. This one-way trend has now lasted for almost two months and even though many traders may think it is premature, it could be time to start talking about whether the Australian dollar will hit parity with the US dollar. It is hard to believe that the Australian dollar is as far being even with the US dollar as the Canadian dollar was just six months ago. With the housing market in Australia still strong, the central bank could continue to raise interest rates. Next week’s Australian employment numbers will help to confirm or deny that. The Canadian economy is also performing very well. In September, employment jumped by 51k, which is the biggest rise in six months. This drove the unemployment rate down to 5.9 percent, a 33-year low. Given that the market was looking for only the jobless rate to rise and only 15k jobs to be added by Canadian firms, this number completely blew away expectations, causing the Canadian dollar to rise to a 31-year high. Like in Australia, another rate hike by the Bank of Canada is still on the table. The only meaningful economic data from Canada next week is the trade balance. Although there was no economic data from New Zealand overnight, the currency also rallied on general optimism towards high yielding currencies. New Zealand retail sales are the only piece of data due out next week.

Euro: Sharp Intraday Reversal Opens Door for Move Back to Record Highs
Having hit a low of 1.4033 intraday, the reversal in the EUR/USD was impressive. Although the price action may be largely due to the reasons listed in our USD Commentary, ECB President Trichet’s refusal to acknowledge the burden that a strong Euro is having on the region’s economy is still giving traders the green light to go long Euros. Exporters and politicians are already screaming and we believe that it is only a matter of time before the ECB buckles as well. What they need is more confirmation that the economy is weakening and we may get a bit of that in next week’s economic reports. Germany, France and Italy are all releasing industrial production numbers and we are expecting German factory orders. There are also no less than eight ECB officials scheduled to speak which could provide some interesting fodder for trading.

British Pound Extends Gains Ahead of Busy Data Week
Despite warnings from HSBC that “hot money” could be exiting the UK in the coming months as growth slows and funds lose confidence in the country’s economic management, the British pound continues to rise. There are a lot of UK economic data due out next week including producer prices, industrial production, retail sales and the trade balance. The market will be looking to these numbers for more clarity on whether the Bank of England will be lowering interest rates this year. Bank of England Governor King is also scheduled to speak on Monday. If he remains hawkish, the GBP/USD could take out 2.05.

Carry Trades Rally as Dow Hits New Record High Intraday
Japanese Yen crosses have performed extremely well with the Dow hitting a new record high on an intraday basis. The stronger US number has helped to alleviate some concerns that the US economy could fall into a recession and now that the risk is eradicated for the time being, traders are a bit more willing to take on risk. On Wednesday, the Bank of Japan begins their 2-day interest rate meeting. Rates are not expected to be changed, which should make the announcement a non-event. Japanese markets are closed Monday.

Kathy Lien is the Chief Currency Strategist at FXCM.