Dollar enjoys strong U.S. growth through the blizzards

Canadian employers delivered a sharp repost to Finance Minster Jim Flaherty’s observation that the economy faces a “challenging labor market” that saw a surge on job growth. The report set the stage for a similar outcome from the U.S. employment report where employers had been expected to add the most jobs in three months. In the event the January employment report was hamstrung by bad weather leaving foreign exchange markets swinging wildly in its wake, desperate to believe in a bigger picture recovery story yet disappointed by the drama of the shortfall.

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U.S. Dollar – Employers only added 36,000 workers but the bigger headline was stolen by the news that more than 700,000 workers hampered by the weather couldn’t get to work. The other out-of-whack data point was a slide to 9.0% from 9.4% in the overall unemployment rate meaning that it’s extremely difficult to see beyond the snow to understand today’s data. Only when the labor market plays up to the expectations of Chairman Bernanke can the dollar bask in the hopes of a favorable policy shift underpinned by rising yields. His remarks on Thursday indicating recognition of a stronger recovery but he still says he needs more proof before he and the Board can be assured it's become entrenched. Still, Dallas Fed Governor Fisher told Bloomberg news that he can't see a case beyond the current round of easing for further measures. The dollar index swooned before surging in response to today’s data as investors jump to the safety of the view that the U.S. economy continues to grow.

Canadian dollar – The Canadian dollar is teetering on the brink of a surge to its highest since May 2008 following news that employers added more jobs in December and January than was forecast. Before the January report earlier Friday morning, economists had believed that the net employment change for the two months would be 37,000 playing into the hands of Jim Flaherty’s “challenged” labor markets. However, a back revision to the year-end report plus a blockbuster gain of almost five-times the expected January reading means that the economy produced just about 100,000 jobs instead. Full-time employment rose in January by 31,100 while part-time roles jumped by 38,000 with reasonably balanced gains between public and private positions. The labor market attracted more job-seekers, which swelled the labor pool and accounted for a two-tenths gain in the unemployment rate during the month to 7.8%. The greenback swooned as the loonie surged on the news to $1.0153 before stability resumed. The Canadian dollar lately bought $1.0135 U.S. cents.

Euro – The euro was one of the few units to crack against the dollar in the hour ahead of Friday’s jobs data, possibly on account of the scale of its slide the day before. The euro remained in a tight range trading at an unchanged $1.3632 before the report. EU officials meet in Brussels shortly to discuss further measures to resolve the sovereign debt crisis. ECB President Trichet hammed the euro’s rebound by serving up a warning after leaving interest rates unchanged that we shouldn’t be complacent about the health of Eurozone governments. The weekend discussions in Brussels will see opposing views from German ministers over possible bond buying initiatives using the stability fund. The euro rallied before extending its slide and buys $1.3588 after today’s data.

British pound – The pound is heading for weekly gains against both the euro and the dollar after a week in which the sands appeared to change with investors wondering whether central bankers’ credibility might be at stake. There was more positive news released Friday in the form of an unexpected January rise in home prices. The monthly Halifax report showed a 0.8% average gain for house prices set against expectations of a decline of 0.3%. Ahead of the U.S. employment report, however, the dollar made its intentions clear and unwound more of the gains that drove sterling to a weekly peak at $1.6278. The pound traded down to $1.6080 ahead of the U.S. data. Domestic reports showed returning levels of activity in service and construction sectors in January while manufacturing rebounded to a record pace to commence the year. Against its European counterpart, sterling pared gains made during the week with the euro currently buying 84.75 pence. After today’s employment report in the U.S., the pound weakened further to $1.6075.

Japanese yen – With little domestically to drive the yen in to the weekend, the main driver of direction versus the dollar was the widening of yield spreads in favor of the dollar. With Thursday’s positive data from the U.S. and a more confident posture from Bernanke, U.S. yields were dragged higher and arguably allowed for an improved tone to the dollar-yen pair. Ahead of the U.S. employment report on Friday morning, the dollar had risen to ¥81.75 maintaining a strong chance that recent weakness to ¥81.30 might have now run its course. The dollar triggered stops propelling it higher close to ¥82.00 after today’s report.

Aussie dollar – The Reserve Bank sounded extremely optimistic in Friday’s quarterly monetary affairs report. Earlier in the week after it stood still on monetary policy, the Bank said it would look through the temporary factors associated with flooding to the North East state of Queensland. However, today it raised its second half growth and inflation forecasts saying that efforts to rebuild the damaged infrastructure along with expansion of coal output would drive GDP higher by 0.5% on its earlier estimate leaving the pace of 2011 growth at 4.25%. It also revised inflationary pressures up by half as much to 3% by the end of this year. The report drove the Aussie to $1.0195 and towards its highest level this year. Optimism over the health of the global recovery is driving investors back to the Aussie where they are starting to see further interest rate increases over the course of the next year. The Aussie is back towards $1.0150 as the greenback extends gains after Friday’s jobs report.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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