The Euro made a new high for the week on Friday, driven by disappointing U.S. jobs data. The rally through the former top at 1.3262 resumed the uptrend while forming a new swing bottom at 1.3119 in the process.
This morning the U.S. government released disappointing jobs data which solidified the thought that the economic recovery was stalling. The report which said private employers added fewer jobs during July than forecast, raised concerns amongst investors about the sustainability of the U.S. recovery.
The disappointing non-farm payrolls data will most likely be used by Fed officials next week when they set monetary policy. The weaker jobs number will most likely mean that the Fed will announce stimulus measures to help revive the economy which may include renewing its quantitative easing program.
Improvements in the Euro Zone economy at a time when the U.S. economy is still struggling makes the Euro a more attractive investment. Upside momentum indicates that the Euro has enough buying power behind it to reach the 50% level at 1.3510 over the near-term.
Earlier this week the European Central Bank monetary policy committee voted to leave its benchmark interest rate unchanged at the historically low 1% level. This move was unanimously expected by traders.
Following the release of the interest rate decision, ECB President Trichet noted that the European bank stress tests completed since the last meeting have helped increase transparency and fueled a move toward restoring market confidence in the banking sector.
In the wake of recent strong Euro Zone economic data, analysts had expected Trichet to outline an exit strategy or discuss the ECB’s plan for its special liquidity provisions. In other words, is the ECB going to continue to provide free-flowing liquidity to the market or begin to withdraw it? Trichet indicated the ECB would consider action on that next month.
Trichet failed to say anything really bullish about the Euro, but actually may have helped limit gains by stating that the second half of 2010 was likely to be “much less buoyant” than the second quarter because of the implementation of new financial austerity measures. He also added that it was too early to “declare victory” in the economic crisis.
Based on Trichet’s comments, the Euro will most likely to continue to be driven by economic news regarding the U.S. economy. At this time, the ECB seems a little more upbeat about the Euro Zone economy while the U.S. Fed is being encouraged to consider the renewal of its quantitative easing program to ward off a potential double-dip recession. As long as the U.S. economy remains weak and interest rates low, look for the Euro to remain firm.
The situation is not all rosy for the Euro however. Many of the recent improvements in the Euro Zone economy have taken place before financial austerity measures were in full effect. Furthermore, the ECB is still providing stimulus. Like the U.S., consumer spending will be the key to sustaining the recovery. If consumers decide to pull in their purse strings at a time when the government is cutting spending, then the economies in the Euro Zone may come to a screeching halt.
Aside from the disappointing U.S. jobs data report, the biggest surprise was the loss of jobs in Canada. Throughout the entire global recession, the talk of the town has been Canada and how the country avoided a prolonged recession and banking crisis.
The USD CAD traded sharply higher due to an unexpected decline in the Canadian jobs market. The news out of Canada reflects its first job losses of the year.
Friday’s Canadian jobs report showed that the economy lost 9,300 jobs in July while the unemployment rate unexpectedly rose to 8 percent from 7.9 percent. Analysts had predicted an increase of 15,000 jobs after a strong gain of 93,200 in June.
The Canadian Dollar fell on the bad jobs data as traders speculated that the weakening U.S. economy would have an adverse effect on the Canadian economy going forward.
Based on the drop in yields and the rise in Canadian bond prices, investors are beginning to price in the possibility that the country’s recovery from the recession is starting to cool and could encourage the Bank of Canada to refrain from additional interest rate hikes over the near-term.
Traders should continue to focus on the weak U.S. economy as the main catalyst behind the movement in the currency markets. With interest rates expected to continue to remain low for a prolonged period of time and the Fed expected to remain dovish on the economy, continue to look for a weaker U.S. Dollar.
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