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SURGE IN CANADIAN PAYROLLS DRIVES LOONIE WILD

By Andrew Wilkinson at IB:

Earlier in the week investor fears about the prospects for a double-dip recession appear to be vanishing into thin air as the week draws to a close. The euro’s rejuvenation continues after the ECB President left the world with an upbeat message at Thursday’s press conference. Meanwhile it appears that the shellacking fared by the commodity currencies over recent weeks was without merit. Following the lead of Australia, a Canadian employment report today proved stellar and has sent the local dollar to a two-week high. The unemployment rate in both nations has now fallen to its lowest since January 2009.

Canadian dollar – The rate of unemployment in Canada jumped from 7.3% to 8% in January 2009 – quite a spectacular leap at the time as the global economy reeled. The June employment report revealed payroll growth almost five times the predicted pace as employers added 67,600 net new positions. In a sign of growing confidence in the health of the domestic economy self employment starts jumped by 25,600, which is actually more than the total anticipated change in employment. Service sector employment surged 103,400 while the goods-producing sector shed 10,200 positions. Overall the national unemployment rate fell to 7.9% as the economy created 226,600 jobs throughout the second quarter.

Taking the report as a sign that the threat from European sovereign debt crisis is probably less than feared, investors rallied the so-called loonie driving it to 96.80 U.S. cents. On June 28 the local dollar rose to 96.84 cents, while this week’s mania drove it all the way down to 93.60 cents. The burning question up for vigorous discussion is whether the Bank of Canada will dare to raise interest rates at its July 20 meeting. Having done so at the start of June it has already publicly stated that further fallout from Europe might scupper global growth given the uneven nature of the global recovery. Investors reacted to the report by driving up the probability of an interest rate increase this month from 67% to 80%.

Euro – While the euro is lower today, it’s still not due to any rising Eurozone tensions. The euro buys $1.2617 and ¥111.64 this morning. The words from Jean Claude Trichet at Thursday’s ECB press conference summarize the situation nicely. Concerning the situation in Europe he declared that, “There is a tendency from the outside to be excessively pessimistic. The figures don’t confirm this pessimism.” The President also told reporters that, “Indicators suggest that a strengthening in economic activity took place during the spring. Recent industrial production data from Italy and France have also confounded fears of a Eurozone slowdown.

U.S. Dollar – Despite a positive attitude towards risk this morning the dollar is making headway and the dollar index has so far risen 0.4%. Investor appetite for dollars has flip-flopped recently. Signs of a pause in the recovery dulled dollar demand more recently, equally coincident with a recovery in the euro. Even mildly positive data didn’t seem to allow the dollar to recover. However, following a more upbeat reading of initial claims on Thursday, the dollar appears to be once again finding its feet.

Japanese yen – With risk aversion dimming further as the week progresses, dealers have turned their back on the yen. The Japanese unit looks set for a weekly decline against all 16 of its major trading partners. The dollar rose to ¥88.70 in overnight trading for its best price against the yen in a week. Against the euro the yen managed a gain on Friday and stands at ¥111.75. Investors didn’t seem to shun the yen for political reasons despite the upper house Sunday elections, which according to opinion polls are not expected to help the plight of Prime Minister Naoto Kan.

British pound – The pound is suffering something of a blow-off in early morning U.S. trading. In the space of a couple of hours the pound has slumped from $1.5200 to $1.5079 for little apparent reason. Data today showed the first monthly decline in goods’ prices leaving the factory gate in 18 months as producer prices fell 0.3% from May. The pound remains stronger on the day versus the euro at 83.59 pence.

Aussie dollar – The Aussie remains resolute and is clinging on to Thursday’s employment-inspired gains. As the greenback turns higher, however, the Aussie has ceded some ground this morning and trades at 87.49 U.S. cents.

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