Australian and Canadian Dollars Climb to Fresh Multi Decade Highs (page 1 of 2)

DailyFX Fundamentals 10-05-07

By Kathy Lien, Chief Strategist of DailyFX.com

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 amongst 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.