The US dollar is seeing a welcomed relief rally on the heels of today’s non-farm payrolls report, which would likely have caused broad-based dollar losses had the data come in weaker than expected.

Based on the price action in the FX market, investors are relieved to see an increase in US job growth. Even though the unemployment rate ticked higher and wage growth stagnated, the latest non-farm payrolls (NFP) report beat expectations, rising 175K compared to a forecast of 163K, which was good enough to squeeze the US dollar (USD) higher.

The fact that payrolls exceeded 150K was enough for everyone—including the Federal Reserve—to breathe a sigh of relief.

The rise in the unemployment rate from 7.5% to 7.6% is an annoyance, as is the stagnation in average hourly earnings and the downward revision to last month's report, but the U-6 unemployment rate, which is the number economists follow more closely, actually declined last month, giving the central bank peace of mind. As a result, today's number will not change the conversation that the Fed is having about tapering asset purchases later this year.

For FX traders, the main question is whether today's number will halt the aggressive decline in the US dollar and put a bottom under USDJPY.

While the momentum is still to downside, the fact that the US economy is creating more jobs is good news for the dollar. Since USDJPY peaked on May 22, it has fallen about 6%, and an unambiguously weak payrolls report would have been the nail in the coffin and would have almost certainly driven the pair below 95.

Fortunately for the dollar, however, the headline number actually beat expectations, triggering a relief rally in the greenback.

The Bank of Japan (BoJ) meets next week, and there is a realistic possibility that the central bank will take additional action to stem the recent slide in the Nikkei and rise in the yen. This risk is yet another reason why anyone who has shorted USDJPY down to 95 is now reversing their positions.

Canada Posts Sparkling Job Report

Meanwhile, Canadian job growth was very strong. Canada added 95k jobs last month, the largest amount ever, which sent the Canadian dollar (CAD) sharply higher.

To put this into perspective, this would be akin to 900K jobs created in the US economy if we adjusted for the population. Unlike the US, Canada’s unemployment rate declined and the labor participation rate increased.

For the Bank of Canada (BoC) and new governor Stephen Poloz, the latest employment numbers will keep monetary policy steady with a bias towards raising rates. Compared to the rest of the world, Canada's economy is a shining star, and that will attract demand for the loonie.

While the rally in the CAD against the USD is limited, the Canadian dollar hit a two-year high against the Australian dollar (AUD) on the back of today's employment report.

By Kathy Lien of BK Asset Management