US Dollar Dominates as NFPs Fall by Only 11,000 - Best Results Since December 2007

US Dollar Dominates as NFPs Fall by Only 11,000 - Best Results Since December 2007
The US dollar rocketed higher upon the release of the US non-farm payroll (NFP) report, which surprisingly showed that the labor market only lost 11,000 jobs in November, compared to forecasts for a decline of 125,000. Furthermore, this was the best reading since December 2007, when the US gained 120,000 jobs, suggesting the labor markets may be nearing a turning point. A breakdown of the report shows the bulk of jobs were gained in the services sector as business services employment rose by 86,000 while education and health employment rose by 40,000. There’s no doubt that this was all positive news, including the drop in the unemployment rate from 10.2 percent to 10.0 percent. However, it’s necessary to keep in mind that with 10 percent of the population unemployed (or 17.2 percent if you count marginally attached workers and those employed part time for economic reasons), there still isn’t as much impetus to fuel consumption growth as there has been over the past 26 years, especially when taking tighter credit conditions into account, suggesting that any economic expansion that occurs going forward may be mild from a historical perspective.

In other economic news, the Commerce Department reported that US factory orders rose 0.6 percent in October, marking the second straight increase following September's rise of 1.6 percent. The data was better than expected since forecasts had called for no change in light of the 0.6 percent decline in durable goods orders during the same period. Nevertheless, broad gains in shipments and orders of consumer goods helped prop the overall index higher as retailers prepared for the holiday shopping season.

Looking ahead to next week, additional signs of percolating consumption may hit the wires. On Friday, the Commerce Department is forecasted to report that US retail sales rose 0.6 percent in November, after rising 1.4 percent in October on the back of auto sales. Likewise, the retail sales index excluding autos is projected to increase by 0.5 percent, but looking at the International Council of Shopping Centers report, the results could be disappointing. The ICSC index showed that same store sales fell 0.3 percent in November from a year earlier, led by apparel and department store sales. However, with sales of jewelry and electronics reportedly up sharply to mark the start of the holiday shopping season on Black Friday, the upcoming advance retail sales report could reflect rising consumption trends through the end of the year. The US dollar’s response to the data may have more to do with Treasury moves than anything else, as news that stokes higher yields will also ignite gains in the greenback.

Related: Discuss the US Dollar in the DailyFX Forum

Canadian Dollar Gains as Economy Unexpectedly Gains 79,100 Jobs
The Canadian dollar was the second strongest of the majors on Friday after Statistics Canada reported that the nation’s economy gained a net 79,100 jobs in November, primarily in the services sector, which brought the unemployment rate down to 8.5 percent from 8.6 percent. The index handily beat expectations for an increase of 15,000, but that said, the jobs were almost evenly split between full-time and part-time, suggesting that a good number of the positions may just be temporary for the holiday season. Nevertheless, the improvement bodes well for consumption in coming months. In other economic news, the Ivey Purchasing Managers Index (PMI) for Canada's business sector fell more than anticipated in November to 55.9 from 61.2, signaling that activity is still growing, but at a slower pace. A breakdown shows that price growth abated while employment conditions deteriorated, but the latter runs directly counter to Canada's government labor market statistics, signaling that this component shouldn’t really be used as a leading indicator for the official results.

Related: Discuss the Canadian Dollar in the DailyFX Forum

Euro Down Despite Brighter Bundesbank Outlook, British Pound to Face BOE Decision Next Week
The euro and British pound both fell against the US dollar, but the former was hit much harder despite some positive fundamental news for the Euro-zone. Indeed, the Bundesbank raised its growth forecasts the region’s largest economy, Germany, saying the GDP may rise 1.6 percent in 2010 and 1.2 percent in 2011, compared to June’s forecasts for an outright stagnation in 2010. They went on to say that the economic outlook “has brightened perceptibly in recent months,” thanks to “extensive” monetary and fiscal stimulus. This comes on the tails of the European Central Bank’s policy meeting yesterday, after which ECB President Jean-Claude Trichet said that some of their emergency liquidity programs would be ending and suggested that others would come to a close in 2010.

Looking ahead to next week, the Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated that they would be expanding their quantitative easing program by £25 billion to £200 billion, but since this was smaller than anticipated, the British pound rallied. This time around, no program changes are expected, and as a result, the currency could gain on the news as traders would price in an end to the BOE’s quantitative easing program.

Related: Discuss the Euro in the DailyFX Forum, Discuss the British Pound in the DailyFX Forum

Japanese Yen Plummets as USDJPY Determines Price Action
The Japanese yen plunged across the majors on Friday, losing over 2.5 percent against the US dollar and Canadian dollar, as sharp directional USDJPY moves have indicated a divergence between the two low-yielding currencies. Indeed, the bigger market link was between Treasuries and the greenback, as 2-year yields jumped 11 basis points while 10-year yields increased by 9 basis points. Furthermore, USDJPY daily RSI had been trading at oversold levels as recently as Tuesday, suggesting that the pair was due for a rebound. Given the extent of the rally in the pair, though, there is potential for the currencies to become correlated once again, as this dynamic has occurred following past NFP releases.

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