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US Dollar, Japanese Yen Mixed as Surge in Unemployment Rate to 26-Year High Sparks Choppy Reactions

•    Canadian Dollar Dives Despite Other Commodity Dollar Rallies as Economy Unexpectedly Loses 43,200 Jobs in October
•    Euro Lags Following Cautious Comments from ECB’s Nowotny, Gonzalez-Paramo
•    British Pound Gains Against Dollar as UK Producer Prices Rise for Eighth Month

US Dollar, Japanese Yen Mixed as Surge in Unemployment Rate to 26-Year High Sparks Choppy Reactions
The US dollar and Japanese yen ended Friday mostly higher, but the entire day of trading reflected very choppy price action. The Labor Department reported that US non-farm payrolls fell by 190,000 in October, which was the smallest drop since August 2008, but was also slightly worse than forecasts for a drop of 175,000. However, the initial rallies in the US dollar and Japanese yen, along with the plunge in S&P 500 futures were indicative of risk aversion in response to the surge in the unemployment rate to 10.2 percent, the highest since April 1983, from 9.8 percent. Nevertheless, sentiment turned more positive by the time the New York trading session got going, as the DJIA and S&P 500 were both up slightly within a few minutes of the market open, suggesting that the slowing pace of job losses has resonated more than the pop in the unemployment rate.

A closer look at the employment report showed that any improvements in the labor market have been contained to part-time jobs, as this subset’s unemployment rate slipped to 6.1 percent from 6.4 percent, while the full-time worker unemployment rate rose to 11.1 percent from 10.7 percent. Meanwhile, goods-producing firms let go the most workers, as the sector lost 129,000 jobs, while the services sector lost 61,000, led by trade and transport firms. The only sectors to increase job levels were in temporary business services along with education and health.

Related Article: US Dollar to Remain Volatile Ahead of Four Major Rate Decisions and NFPs
 
Canadian Dollar Dives Despite Other Commodity Dollar Rallies as Economy Unexpectedly Loses 43,200 Jobs in October
The Australian dollar and New Zealand dollar were two of the strongest majors as they held onto gains achieved during the European trading session. The Canadian dollar, on the other hand, experienced steep declines at 7:00 ET, as the Canadian net employment change was disappointing at -43,200 for the month of October. Indeed, forecasts were actually calling for a net increase in jobs, but a breakdown of the report showed that 59,700 part-time job losses offset any gains in full-time jobs. As a result, the unemployment rate climbed back up to a two-month high of 8.6 percent from 8.4 percent, hurting prospects for a consumer-led recovery.

Euro Lags Following Cautious Comments from ECB’s Nowotny, Gonzalez-Paramo
The euro lagged against most of the majors on Friday, as European Central Bank Council member Ewald Nowotny said that the bank has not decided if they will continue their 12-month loan program and that it "depends on economic developments." This statement ran counter to the more biased comments issued by ECB President Jean-Claude Trichet on Thursday, as he said he didn't want to "dispel" market speculation that the program would come to an end next month. Nowotny was also quite cautious on the outlook, as he questioned "whether we will succeed in turning this weak upswing into a stronger dynamic for the euro area, or are we facing the problem of heading into a lost decade like Japan had," indicating that he wouldn't rule out the risk for Europe. Meanwhile, ECB Executive Board member Jose Manuel Gonzalez-Paramo said that discussion of exit strategies doesn't signal immediate action nor rate hikes.

Next week, the release of Q3 GDP for the Euro-zone will be the next best gauge of the ECB's policy stance going forward. The quarterly rate of Q3 GDP is projected to rise for the first time since Q1 2008 by 0.5 percent, while the annual rate is anticipated to edge up to -3.9 percent from -4.8 percent. Overall, there are some downside risks for this report, as the purchasing managers’ index (PMI) for the manufacturing sector rose throughout Q3, but only managed to rise above 50 in October, suggesting that the sector’s contraction in activity simply waned. On the other hand, PMI for the services sector rose above 50 in September, indicating an expansion in activity. All told, any positive quarterly GDP result would likely yield a very strong reaction from the euro, but if the figure continues to signal a contraction in the Euro-zone’s economy, the currency could drop sharply on speculation that the European Central Bank will have not start to close down their liquidity programs in December.

British Pound Gains Against Dollar as UK Producer Prices Rise for Eighth Month
The British pound fell against the Australian dollar, Japanese yen, and New Zealand dollar, but rose versus the euro and US dollar as the UK's producer price output index rose for an eighth month in October, this time by 0.2 percent. However, input prices rose at a much faster pace of 2.6 percent, as the cost of oil and imported goods climbed, suggesting that businesses still have very little pricing power and may be struggling to boost margins. Highlighting the lack of consumer price growth was the fact that the Bank of England expanded its quantitative easing program on Thursday in an effort to prevent inflation from falling sharply.

Looking ahead to next week, the release of the Bank of England’s Quarterly Inflation Report could impact British pound trade if there are significant revisions to the central bank’s growth or inflation outlook. The BOE’s last inflation report reflected forecasts for GDP to become positive once again during the second quarter of 2010, as the contraction likely bottomed out in Q1 2009. Beyond that, though, any expansion in the UK economy is likely to be very slow. Meanwhile, the BOE’s outlook for CPI called for inflation to remain volatile by falling sharply in the short-term, with BOE Governor Mervyn King noting that he would likely “need to write a letter to the Chancellor to explain why inflation has fallen more than one percentage point below the [2 percent] target.” That said, the Q3 GDP reading of -0.4 percent for the UK was surprisingly weak and suggests some potential for the BOE to push back their estimates for recovery until later in 2010. If this is the case, the British pound could fall very sharply, especially since the BOE recently expanded their Asset Purchase Facility by £25 billion to £200 billion.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
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