By DailyFX - US Dollar - Thanks to a stronger than expected non-farm payrolls report, the US dollar staged an impressive end of week rebound....

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Even though job growth was the
weakest in 2 years, the health of the labor market was better than what many traders
were anticipating. Having sent the CME derivatives down to 75.5k this morning, the
market was leaning more towards a weaker report. However revisions remained the
name of the game as January payrolls were notched up by 37k while average hourly
earnings increased by a more than expected 0.4 percent. Average weekly hours
dropped slightly but that may be related to the near record low temperatures in the
month of February. In addition to the sharp upward revision the prior month, 505k
people were not included in the household survey because of the weather; this the
largest exclusion in 10 years and indicates that we could either see a strong
rebound in March or a sharp revision to the February number. Both the stronger
revision and the higher wage pressures will prompt the Federal Reserve to think
twice about cutting interest rates in August. Before getting too dollar bullish
however, the problems in the sub-prime lending sector continues to grow. We already
know that New Century, the countrys second largest sub-prime lender is already at
the brink of bankruptcy. However today, WMC Mortgage, the 9th largest sub-prime
lender also announced that they will be closing 4 out of their 9 branches as well as
cutting 20 percent of their workforce. The Fed is watching the sub-prime lending
sector very closely as more investors become affected by the shakeouts in the
sector. They also realize that this has significant implications for the housing
market as a whole. Tighter lending rules could shave 200k home buyers from the
market. Next week, we have a busy US calendar that starts off with retail sales on
Tuesday. Yesterday, Wal-Mart blamed their weaker sales on the wintry weather. This
suggests that next week's retail sales numbers and the US dollar could also face
downside risk. The trade deficit also narrowed in the month of January, which is
sure to have contributed to the overall dollar strength.

Euro - The Euro slipped as traders adjusted their monetary policy outlooks for the
ECB and Federal Reserve. ECB President Trichet basically told traders on Thursday
not to expect an interest rate hike in April while todays US data has some
traders pricing in a later rate cut from the Federal Reserve. Eurozone data this
morning provided little direction with stronger German data countered by weaker
French data. The wholesale price index for the month of February and the trade
balance for the month of January both came out much stronger than expected, but the
French industrial production and trade balance figures deteriorated. Looking ahead,
although next weeks Euro strength and weakness will most likely be determined by
US data, there are a few notable releases on the Eurozone calendar. This includes
the German ZEW survey, Eurozone CPI and the release of the ECB monthly bulletin for
March. Even though the ECB is still on track to raise rates again some time this
year, the economy could begin to feel the impact of the Value Added Tax increase in
Germany which means that the ZEW survey runs the risk of surprising to the downside,
especially as analysts are typically more pessimistic than businesses. Meanwhile
Switzerland is scheduled to announce its quarterly monetary policy decision next
week along with retail sales. The Swiss National Bank is expected to lift interest
rates given the recent strength in the overall economy.

British Pound - Despite softer manufacturing data this morning, the British pound
has strengthened against the US dollar, Euro and Japanese Yen. Industrial
production increased by a less than expected 0.1 percent in the month of January
while manufacturing production dropped by 0.2 percent. On balance, the British
pound has not done little this week after having broken down the prior week. The
economic calendar in the week ahead is more interesting which should deliver some
pound driven flows. We are expecting producer prices, the trade balance, more
reports on the state of house prices and labor market data. Overall, the UK economy
is holding up well and we expect the reports to reflect that. We will have to wait
until March 21st to have more light shed on the outlook for UK monetary policy.

Japanese Yen - The reversal in the Japanese Yen continued as the currency loses
more ground against the majors. A rosier outlook for the US economy has encouraged
some traders to jump right back into the carry trade. The NZD/JPY and CAD/JPY were
the best performing currency pairs of the day, as hawkish comments from RBNZ
Governor Bollard earlier this week has traders buying New Zealand dollars in hopes
of higher yields. Overnight, the only piece of data on the calendar was January
machinery orders which were stronger than expected. The stability in the equity
markets should have central bankers from around the world including the Bank of
Japan breathing a sigh of relief. If the stock markets continue to rebound, traders
may be comfortable enough to return their focus to the BoJs rate tightening
cycle. Looking ahead, we are expecting second quarter GDP, current account,
Domestic CGPI, consumer confidence, industrial production and leading indicators
next week. The Japanese economic calendar is busy which suggests that the market
may continue to focus on the Yen.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies are all up
strongly today thanks to a return of carry trade demand and firmer economic data.
There were no Australian and New Zealand data released last night, but traders are
most likely still reeling off of the hawkish comments from the RBNZ earlier this
week. Canada on the other hand reported a firm rise in employment for the month of
February and an unexpected increase in the trade surplus for the month of January.
The Canadian economy has been performing very well and we are finally seeing that
filter into loonie strength. In the week ahead, labor productivity, manufacturing
shipments and capacity utilization are the only pieces of CAD data on the calendar.
Australia will be reporting business confidence, labor market data and consumer
inflation expectations. New Zealand has house prices, the Manpower survey and
retail sales on the docket.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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