Bob's Currency Focus - Friday

Payrolls are good, yet the Dollar sinks

Today was one of those crazy trading days where logic went out the window. Dollar supporters were praying for a good nonfarm number to boost the chances of a short-term dollar recovery. The number was better than expected and when one takes into account the fact that August’s -4k number was revised to +89K, one would think that this was mega news to push the dollar significantly higher. After all, the Fed cut interest rates by 0.5% last month, on foot of the then reported -4K jobs contraction. Markets had anticipated 100k new jobs in September and got 110k plus a net +94k thanks to the revision for August.

EUR/USD plummeted to 1.4032 from 1.4130 before staging a Lazarus-like recovery to rally to a current 1.4150. Why? If anybody knows, answers please on a postcard to the above address. Why the earlier moves this week, if there is no follow through when there is actual hard evidence to support the dollar? It may be that major players have remained out of the market until the dust has settled and with rate cut expectations on the wane following today’s news, we could see the dollar make a genuine move next week.

And what of the loonie? CAD came off a full two cents from its overnight price to hit a staggering 0.9785 against the US dollar Friday. That is a 2% move and when one considers it had already advanced 17% since March, we are now witnessing one of the sharpest moves we have ever seen amongst a major currency pair. Although Canadian employment data was much stronger than expected, employment is a lagging indicator and the true impact of Canada’s lack of competitiveness owing to its muscled currency won’t be known for a few months. While in economic terms one would believe the currency’s rally is not sustainable, we must remember that the CAD’s rally is more speculatively driven than fundamentally driven and speculators won’t stop while there’s more profit to be had. Of course it isn’t sustainable from an economic perspective but it now looks as though we won’t see a reversal until the loonie runs off a cliff, with the Canadian economy close at hand. There is much disquiet within the euro area about the overvalued euro and the impact this is having on business, yet the euro is only up 7% this year against the US dollar, while the Canadian dollar is up 16%. And add to this the fact that less than 10% of euro area exports go to the US, whereas 80% of Canada’s exports go there. Go figure! The Canadian Foreign Minister has attributed the loonie’s rise to a weak US dollar, but that’s only part of the story. CAD is the speculators favourite currency this year and it has been driven to values far beyond its remit. And the Canadian economy will soon be picking up the tab, mark my words Mr Dodge.

Bob B