August 7, 2009

The U.S. Dollar posted a strong reversal to the upside today following the release of a better than expected U.S. Non-Farm Payrolls Number. The report which showed a loss of jobs less than economists had estimated sent a signal to traders that the U.S. may be the first major economy to recover from the recession.

Traders most likely bought the Dollar in anticipation of the Fed announcing the end to its easy money policy and perhaps introducing an exit strategy which includes a rate hike. The Fed holds a two day meeting next week with an announcement due on August 12th.

Traders seemed to be buying the Dollar in anticipation of the U.S. gaining an interest rate advantage over currency markets which still have rates at historically low levels.

The GBP USD posted a closing price reversal top on a weekly basis which could be setting up the start of a minimum 2 to 3-week correction of the current uptrend. Earlier in the week, the Bank of England started the break with an announcement to add more funds to its quantitative easing program. Today's bullish U.S. unemployment report helped accelerate the move to the downside.

The EUR USD also formed a weekly closing price reversal top. Weakness started on Thursday after the European Central Bank decided to leave rates unchanged. Today's bullish economic news from the U.S. could be signaling the start of rate hikes by the Fed, which would tighten up the interest rate differential between the Dollar and the Euro.

Talk of the Fed possibly hiking rates also helped the USD JPY rally. With the Bank of Japan expected to leave interest rates at 0.1% at next week's meeting, a hike in rates by the U.S. would increase its interest rate advantage over the Japanese currency.

Speculators anticipating a recovery in the U.S. economy and a possible end to the Fed's easy money policy helped boost the USD CAD. Technically this pair formed a weekly reversal bottom which should lead to a minimum 2 to 3-week correction.

Higher yielding currencies such as the NZD USD and AUD USD finished up for the week but lower on Friday. Today's better than expected unemployment report may be signaling a change in U.S. interest rates which would change the interest rate differential between the U.S. and Australia and the U.S and New Zealand. Traders most likely lightened up their positions in anticipation of higher yields in the U.S.