by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar settled close to 1.4135 against the Euro ahead of the US payroll data on Friday. The US currency pushed to highs around 1.4040 after the data, but then reversed rapidly with lows around 1.4150.
There were further reports of central bank Euro buying from the Far East and Eastern Europe which was an important contributory factor in the market volatility. The dollar’s reaction and fresh selling pressure illustrates that underlying demand for the currency remains weak, but there will be caution over verbal intervention against the Euro.
The US employment report recorded a 110,000 increase for September which was slightly above expectations. There was an important revision to the August data with an increase of 89,000 for the month compared with the original estimate of a 4,000 drop. Primarily, this reflected a correction to the number of government jobs due to faulty adjustment factors.
Elsewhere, the unemployment rate increased to 4.7% for the month while average earnings growth was 0.4% to give a 4.1% annual increase. The annual benchmark revision for the year to March cut the employment level by 297,000.
The data was still not strong, especially as there were further falls in manufacturing and construction employment. Nevertheless, the figures will make it more difficult for the Federal Reserve to justify a further cut in interest rates at the end of October, especially in view of the earnings data. An adjustment in expectations and higher bond yields should provide some dollar protection.
Fed Governor Kohn stated that the September 0.5% Fed rate cut was a first approximation of what was required for sustainable growth. The comments from Fed officials will be watched very closely next week with the FOMC minutes due for release on Tuesday.
The yen was again unable to move significantly in Asian trading on Friday with caution ahead of the US payroll data and a Japanese market holiday on Monday.
The dollar jumped to 117.20 after the US data which was a 7-week high for the US currency before retreating back to 116.65 in choppy trading. The yen edged lower against the Euro as low-yield currencies suffered.
There has been a sustained recovery in global risk appetite over the past two weeks and reduced fears over global growth will tend to lessen yen demand. It will be difficult for confidence to strengthen further and this should alleviate selling pressure on the yen with residual caution over aggressive capital outflows.
Sterling retained a corrective tone against the Euro on Friday with support weaker than 0.6950. The UK currency remained volatile against the dollar as the UK currency found support close to 2.03 before rebounding to 2.04 as the US currency lost ground.
Sterling has been undermined to some extent by reports that the government will downgrade growth forecasts next week while pay settlements also edged lower for September in the latest survey. The UK housing trends will continue to be monitored very closely as the sector still poses very important downside risks to the economy.
The government’s pre-budget announcement will be delivered next Tuesday and any decision to hold a general election will also be announced early next week. There will be further market expectations of a Bank of England rate cut during the fourth quarter.
The franc retreated against the Euro again on Friday with a further test of support beyond 1.6650. The dollar pushed to highs around 1.1850 against the Swiss currency after the US payroll data before a sharp retreat to 1.1760 in choppy trading.
Demand for commodity currencies has remained strong and this will tend to undermine the franc in the short term, especially as the US employment data will ease immediate fears over global growth trends.
Short-term franc demand will also be stifled by the improvement in risk appetite, although volatility will remain an important risk factor.
The Australian dollar has remained resilient over the past 24 hours and pushed to test 23-year highs at 0.90 against the US currency in New York as the dollar failed to hold gains. The local currency continued to draw support from the strength of commodity prices while confidence over global growth conditions also helped underpin the Australian unit.
There were no significant domestic developments with the Australian currency still gaining underlying support on yield grounds. It will be difficult to extend the recovery in risk appetite given the favourable international trends now priced in and this will tend to curb Australian dollar buying.