Morning Currency Wrap for Friday February 4, 2011

U.S. Job's Report Was Terrible, But USD Up Anyway - Nonfarm payrolls for January increased by 36K, which is a far cry from the increase of 148K that had been expected. Despite the smaller-than-expected increases, the headline unemployment rate fell sharply to 9.0% from 9.4% in December. But this is not good news because the drop in the unemployment rate is mostly due to discouraged workers leaving the labor force. After all, Fed Chairman Bernanke just stated yesterday that the economic recovery hasn't been strong enough to significantly reduce unemployment and that it will be several years before the unemployment rate returns to a more normal level. Surprising the USD was up against the Euro and the GBP despite the terrible jobs data. It looks like that European Central Bank President Jean-Claude Trichet's comments yesterday after the ECB policy meeting was able to dampen speculation on early interest rate increases. Trichet said inflation expectations remained firmly anchored and inflationary pressures over the medium to long term should remain contained, which prompted euro zone interest rate futures to pare expectations of a rate increase by August to around 90% after having fully priced one in beforehand. Also, weighing on the Euro was the return of the European sovereign debt crises to the front pages with today EU summit. Very few market players expect anything startling to emerge as measures to reinforce a bailout scheme for struggling member states are not expected to be taken until March. In Asia, the USD was up against the Yen as the recent rise in bond yields continues to favor the U.S. over Japan. Meanwhile, the USD was down against the dollar block currencies of the AUD, NZD, and CAD, which are showing better growth prospects and higher interest rate expectations that the U.S. An example of this was the performance of the CAD today, Canada added 69,200 more jobs in January, far more than most forecasts, while the unemployment rate unexpectedly ticked up from 7.6% to 7.8%. It was the fourth highest payroll number in the last five years and to put it perspective the 69K increase for Canada is the equivalent of about 600K increase in the US, Wow.