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Living up to its reputation, the non-farm payrolls report triggered sharp volatility across the financial markets. The U.S. dollar dropped below 82 against the Japanese Yen while the EUR/USD climbed within 15 pips of 1.40 against the euro on the heels of the NFP release. According to the latest labor market report, American workers continued to lose jobs with non-farm payrolls falling by 95k in the month of September. Thankfully private sector payrolls did not fare as poorly with 64k jobs added last month. The unemployment rate remained unchanged at 9.6 percent. The U.S. government cut jobs more aggressively than the market anticipated and because of that the dollar fell sharply against all of the major currencies. However with a large upward revision to last month’s private sector payrolls number, the non-farm payrolls report is not nearly as negative as the headline number suggests. The most important takeaway from this morning’s release is that the Federal Reserve still has a very difficult decision to make in November. Fed President Bullard was the latest FOMC member to say that “more easing is not obvious.” We are beginning to see more and more policymakers on the fence about starting a new asset purchase program which is positive for the U.S. dollar. Over the past few weeks the dollar has become extremely oversold and any apprehension by the Fed will make short dollar traders anxious.
It also doesn’t help that European officials are starting to become worried about the strength of the euro. Shortly after the payrolls report, Jean-Claude Juncker, the head of the euro-area Finance Ministers said the euro is too strong and the dollar is not in line with fundamentals. He is one of the first high level European official to express concerns about the rapid appreciation of the euro and his timing is perfect because the EUR/USD has become extremely overbought. However he was not completlely transparent because he also said that he would invest in the euro at 1.40. Interestingly enough, Junker believes that the Yuan is overvalued and he is not happy with their exchange rate. This is important because it suggests that the Europeans will have a hearty debate on whether they should back the Americans or the Chinese on currency reforms.
At the end of the day, the upcoming IMF and G20 meetings should lead to some profit taking in the EUR/USD but that does not mean the downtrend in the dollar is over. As long as the Federal Reserve is still considering easing monetary policy, investors will have little reasons to buy dollars. Don’t expect the dollar stabilize until Treasury yields stop falling.