Non-Farm Payrolls Was Strong, But Can the Dollar Rally Continue?
Concerns about US economic growth have now been pacified by the strong level of hiring in May and June. The US dollar, stocks and yields are all up on the day as the latest piece of good news injects the market with a shot of optimism. A rebound in growth in the second half of the year is far more likely at this point than a slowdown. Although the problems in the housing market have not gone away, as long as the labor market remains steady, they will not exacerbate. With oil prices rising to a 10 month high today, expect the dollar to continue to gain in the week ahead barring any surprise intervention or moves by other central banks. Federal Reserve Chairman Ben Bernanke will be speaking about inflation and the risks are clearly skewed to the upside. When oil prices were above $70 exactly one year ago, inflation shot up globally. There is no reason for pricing pressures to be different this time around. In fact, the dollar is weaker now than it was then on a trade weighted basis, which means the inflationary pressure could be even greater. Strong and tough words by Bernanke could drive further dollar strength, especially against the Japanese Yen. Aside from Bernanke’s comments, we are also expecting the trade balance and retail sales at the end of next week. The trade balance is expected to improve while retail sales are predicted to be particularly weak. In fact, expectations are so low that a small upside surprise could still be dollar positive.

Japanese Yen Sinks to Multi Decade Lows on Renewed for Carry Trades
Rising oil prices and strong US job growth sent carry trades to fresh highs today. With the labor market sparing the US economy from a major downturn, the market is hungry for risk and yield. Selling of the Japanese Yen has been so strong that the currency hit a new record low against the Euro, a 20 year low against the high yielding New Zealand dollar, a 16 year low against the Australian dollar and a 14 year low against the British pound. In other words, the Yen crosses hit decade and for some, multi decade highs. Since the beginning of the year, crude prices have increased over 40 percent. Oil prices have a big impact on inflationary pressures both here in the US as well as globally. The higher oil prices rise, the longer central banks will keep interest rates high, which in one word, boils down to CARRY. $80 oil is now in focus and as long as prices continue to climb, the central banks of these respective countries have no choice but to leave interest rates at their currently lofty levels, keeping demand for carry trades intact. The Japanese Yen has now fallen to levels critical enough for Prime Minister Abe to start warning that Japanese authorities are “always watching currencies carefully” and that “rapid moves are undesirable.” With the Bank of Japan rate decision scheduled for next week, we would not rule out the possibility for another rate hike just to shore up demand for the currency. Aside from the rate decision, Japan will also be releasing their current account, domestic CGPI, consumer confidence, and industrial production figures.

Canadian Dollar Hits 30-Year Highs Ahead of Central Bank Rate Decision
The Canadian dollar hit a new 30 year high thanks to the combination of strong economic data and higher oil prices. After two months of weak hiring, Canadian companies added 34.8k jobs onto their payrolls in the month of June. The country continues to enjoy the tightest labor market in years. Despite a strong currency, the economy remains strong which is why the Bank of Canada is widely expected to lift interest rates next week. Whether they will retain their hawkish bias is more of a question. Aside from the rate announcement, the trade balance is also due for release. If the strong currency were to have some detrimental impact on the country, it would be on trade. The Australian dollar is also higher thanks to rising gold prices. Business confidence, employment and consumer confidence are due for release next week. Meanwhile the New Zealand dollar has struggled to rally for the past four days. Retail sales and business PMI are the only pieces of New Zealand data of consequence next week. Stronger numbers will add fuel to carry trades.

Euro Rebounds on the Back of Demand for EUR/JPY
Traditionally, the EUR/USD is known as the anti-dollar meaning that it rallies on weak US data and sells off on strong data. In recent weeks however, that has not been the case. For example, today’s US non-farm payrolls number should have sent the EUR/USD tumbling and it did, but only for a brief moment before the currency pair recuperated all of its losses. Demand for EUR/JPY was to blame as traders were transfixed with taking the pair higher and higher. Virtually no retracement has been seen today in the currency’s pair’s near vertical rally. Both German factory orders and the French trade balance were strong, but that added little to the Euro rally. Next week only second tier economic data is due for release. Instead, the market will be focusing on the July monthly report and comments from ECB officials.

British Pound Slips for Fourth Straight Day
Despite stronger than expected UK industrial production data, the British pound slipped for the fourth consecutive trading day. The Bank of England’s interest rate hike this week certainly was a classic “buy the rumor, sell the news” type of event. The currency rallied extensively into the rate decision and dropped almost instantly after rates were hiked. This should mark a near term top in the British pound, at least until the minutes from the meeting are released. Next week, producer prices, BRC retail sales and the trade balance are due for release. Unlike the rest of the world, the strength of the British pound will offset the rise in crude prices. The service and manufacturing sector PMI have already reported a drop in prices. This suggests that inflationary pressures on the producer level may not have been that high in the month of June.

Kathy Lien is the Chief Currency Strategist at FXCM.