US Dollar Fails to Respond to Blowout Payrolls Number: What Gives?
Next to the Federal Reserve’s interest rate decision, non-farm payrolls was the most anticipated event risk this week and it did live up to its reputation of being market-moving, particularly on an intraday basis. However the reaction in the US dollar was not what everyone expected; it has puzzled most traders who wonder why a number that doubled expectations could have sent the US dollar to a fresh record low against the Euro and Canadian dollar. The US dollar did rise in the seconds after the release, but the move completely reversed within five minutes. Theoretically the sharp rise payrolls should give the Federal Reserve more reason to keep interest rates unchanged even though the underlying details of the report were somewhat softer. The breadth of job gains (also known as the diffusion index) and average hourly earnings were weaker than expected. The unemployment rate on an unrounded basis also increased from 4.696 to 4.727 percent. Yet these details are probably not the reason why the dollar fell because they do not have the significance to offset the blowout headline number. Instead, the price action in the market today reflects everyone’s unwillingness to buy dollars. Those who want to be long are already long and any “new” positions being taken are mostly on the short side. If the US dollar can’t rally on strong economic data, what will it rally on? We think that the dollar’s rally will come to an end only when the Federal Reserve ups their degree of hawkishness or the European Central Bank cries uncle and finally warns that the Euro’s rally has become too excessive. We may actually get part of this opportunity next week when Bernanke testifies before the Joint Economic Committee. Besides that, the only numbers worth watching in the US are service sector ISM, the trade balance and import prices. At this point, a move up to 1.50 in the EUR/USD is still more likely than a move back below 1.40.

Euro on its Way to 1.50 Now that the French Have Stopped Screaming
If the Euro manages to close above 1.45 against the US dollar, it could once again be on its way to hitting 1.50. Despite slightly weaker economic data, demand for Euros or distaste for US dollars continues to grow. Both German and Italian manufacturing PMI dropped last month even though the French and overall Eurozone number remained unchanged. Today’s rally may be partially due to comments from the French who in the past were the most vocally opposed to Euro strength. The French Secretary of State said this morning that they are resolving their arguments with the ECB because they have realized that the stronger Euro is helping keep prices under control. This is the main reason why the ECB is so stubbornly hawkish. With oil prices climbing close to $96 a barrel, foreign nations are scrambling to keep prices under control. ECB President Trichet next week, who will be speaking after the bank’s monetary policy meeting, should share this sentiment; interest rates are expected to remain unchanged. Aside from that, we are also expecting service sector ISM, Eurozone PPI, retail sales, German manufacturing data and the German trade balance. As for the Swiss franc, consumer prices were stronger today, but that did little to pressure EUR/CHF. Next week, the Swiss unemployment rate and SECO consumer climate survey are due for release.

Canadian Dollar Hits Record High Following Strong Employment Numbers
It seems like nothing can stop the Canadian dollar, which is rising again on the back of strong employment numbers and the continual rise in oil prices. Today’s Canadian labor market report reflects the country’s economic strength. The number of jobs added last month was five times more than the market’s expectations, driving the unemployment rate down to a 33-year low. September housing starts were also revised to the highest on record. With a strong labor and housing market, the Canadian economy has become far more immune to US economic strength or weakness. This will keep the Bank of Canada on hold into the first quarter with the growing possibility of an interest rate hike. In the week ahead, we have Canadian housing market data, IVEY PMI and the trade balance. We continue to expect USD/CAD to hit 90 cents before hitting parity. As for the Australian and New Zealand dollars, they too are stronger against the greenback today. There was no data released last night, but these currencies will be in play next week with labor market reports from both countries as well as a Reserve Bank of Australia interest rate decision. A rate hike is expected and if it materializes the Australian dollar could be the next currency to hit parity with the US dollar.

British Pound Hits Highest Level Since 1991
The British pound rose for the seventh day in a row to hit the highest level against the US dollar since 1991. Traders continue to shrug off weaker economic data, which indicates that the currency’s strength has been primarily due to dollar weakness rather than improving UK fundamentals. With a mandate to ensure price stability, the Bank of England is in the same boat as the ECB. Next week they are also meeting to discuss interest rates, but no changes are expected. Besides that, we also have service sector PMI, the trade balance and industrial production due for release.

Dow Meltdown Leads to Carry Trade Liquidation
The Japanese yen crosses are all stronger today as the Dow ends the US trading session in positive territory. The stock index was down as much as 120 points intraday off of concerns in the financial sector, but it has since recovered all of those losses. Expect the Japanese yen crosses to continue to move in lockstep with the Dow; there is no reason for this relationship to change in the near future. The Japanese economic calendar is light next week with only leading indicators, machine orders and the Eco Watchers survey due for release.

Kathy Lien is the Chief Currency Strategist at FXCM.