Daily Forex Report - USD surges, US unemployment report beats expectations

* USD: Higher, US unemployment report exceeds expectations, Fed rate hike speculation
* JPY: Lower, pressured by improving risk sentiment, Japan plans new stimulus measures
* EUR: Lower, strong US payrolls report offsets BBK upgrade of its German 2010 growth forecast
* GBP: Mixed, UK auto registrations rise and the UK government pledges to increase public savings
* CAD and AUD: AUD lower & CAD higher, Canada's unemployment rate drops and jobs creation rises

Overview
The USD traded higher after the release of much better than expected US employment report for November making significant gains versus the JPY and EUR. The report fueled early equity market gains and a spike in risk appetite. US November unemployment dropped to 10% from 10.2% and nonfarm payroll falls by 11k. The average workweek rose slightly to 32.2 hours, and average hourly earnings were up 0.1%. The November unemployment report marks the strongest reading since December 2007. The unemployment rate was expected to have been unchanged at 10.2% and nonfarm payrolls were expected to have declined by 130k. Today's US unemployment report may encourage speculation that the Fed could raise rates sooner than had been originally thought. If Fed rate hike speculation gains momentum it may reduce the attraction of the USD as the preferred funding currency. Tuesday the BOJ elected to expand its funding operations and ease monetary policy. This action by the BOJ helped to push Japanese yields lower and encouraged fresh funding activity in the JPY. Whether the USD can build upon today's gains will depend on the Fed's reaction to today's US and employment report. In theory, unemployment is a lagging indicator and one of the last sectors of the economy to post recovery as recession ends. A more rapid improvement in the US labor market outlook could make it harder for the Fed to justify maintaining low yields for an "extended period." The USD will likely benefit when the Fed signals that it is ready to begin removing stimulus. Today's US unemployment report may not be enough just yet to change the trajectory of Fed monetary policy outlook. Two key issues that the Fed will consider include inflation and how Fed policy may be impacting asset prices. If US inflation remains in check, the Fed can justify maintaining low yields for an extended period of time. The wildcard is the outlook for asset prices and whether a continuation of the Fed's ultra-accommodating monetary policy will create the risk of asset bubbles in commodity and equity markets. In his testimony before Congress Thursday Fed Chairman Bernanke said he did not see any major abnormalities in market valuations. Until Bernanke's opinion about the risk of Fed policy creating an asset bubbles changes the USD recovery will likely be short-lived.

There was some interesting price action prior to today's release of US November unemployment with GBP and CAD posting gains. GBP was supported by a report that the UK government will announce a plan to increase the UK savings rate and to try and reduce the budget deficit. CAD traded higher in reaction to report of better than expected Canadian unemployment with headline unemployment down 0.1% and jobs growth reported at 79k. There was limited reaction to a report that the BBK upgraded its German GDP forecast for 2010 and a statement from the Fed's Bullard said that high unemployment may not stop the threat from tightening. The only other news of interest in overseas trade was a statement from Chinese officials that the USD is still at the heart of its foreign reserves and statement from the Japanese government they are working on a new stimulus package. The Chinese news may reduce fears of Chinese USD reserve diversification. Japan's plans to increase its budget outlays will encourage greater focus on the size of Japanese bond issuance. Japan's Finance Minister Fujii tried to reassure investors that the Japanese government will take actions to cap the issuance of new bonds. Focus turns to next Thursday BOE policy meeting.

Today's US data:
The US unemployment rate for November declined by 0.2% to 10% and the US economy lost just 11k in jobs during November. October nonfarm payroll losses were revised from -190k to -111k. Construction and manufacturing payrolls continued to decline with job gains in government, education and health services. October factory orders rose by 0.6%, a flat reading was expected.

Upcoming US data:
Next weeks US economic calendar includes the December 7th release October consumer credit expected at -9.5bln compared to -14.8bln last month. On December 9th wholesale sales and inventories will be released expected at 0.3% and -0.5% respectfully. On December 10th, initial jobless claims for the week ending 12/05 are expected at -465k compared to -457k last week. Also on December 10th, October trade balance will be released expected -36.10bln compared to -36.47bln last month along with November treasury budget expected at -134.75bln compared to-125.20bln last month. On December 11th, November retail sales will be released expected at 0.4% compared to 1.4% last month and December University of Michigan sentiment expected 68.2 compared to 67.4 last month. October business inventories and November import prices will also be released on December 11th. Business inventories are expected to fall by 0.2% compared to -0.4% last month. Import prices are expected to rise by 1% compared to 0.7% last month.

JPY
JPY traded sharply lower after the release of much better than expected US November employment report. The surprise improvement in the US labor market helped to fuel gains in equity markets and contributed to improving risk appetite. The JPY was also pressured by the impact of Tuesday's decision by the BOJ to expand its funding operations and ease monetary policy. The BOJ decision to ease monetary policy has encouraged fresh use of JPY as a funding currency. Prior to the BOJ's monetary policy ease Tuesday, US yields had fallen below Japanese yields making it cheaper to fund in the USD than the JPY. Today's better than expected US jobs report coupled with the BOJ monetary policy ease shifts yields slightly back in favor of the USD. Investors will be closely monitoring the Japanese government's plans to announce a new stimulus package. The concern has been that the governments plan to increase spending to boost domestic growth will require a significant issuance of bonds to fund the spending. A large issuance of new bonds could send long-term yields higher in Japan. Japan's Finance Minister Fujii tried to reassure investors and said that the Japanese government would JGB bond issuance.

Next week's Japanese economic calendar includes the December 8th release of October current account expected at ¥1.51trln compared to last month ¥1.57trln. Preliminary October leading indicators will also be released on December 8th expected this at 2.4% compared to 3.8% last month. On December 9th, second preliminary Q3 will be released expected at 1.2% compared to 0.7% in the original release. On December 10th November CGPI will be released expected that -0.3% compared to -0.7% last month. Also on December 10th November export and import prices and October machinery orders will be released. Export prices are expected to fall by 1.9% and imports by 1.3%. Machinery orders are expected to fall by 5% compared to a 10.5% rise last month.

Key technical levels to watch in USD/JPY include support at 88.00 the December 4th low with resistance at 90.40 the November 13th high.

091204_dailyfx_1

EUR
EUR traded sharply lower pressured by report a surprise improvement in the US labor market. Most of the selling in the EUR was attributed to stops triggered below 1.5000. EUR traded lower despite report that the BBK has raised its German 2010 GDP growth forecast to 1.6% from an original estimate of flat. In addition, the EUR has failed to gain much support from yesterday's announcement by the ECB of its plan to begin an exit strategy from non-conventional policy measures. The ECB plans to let its 12 month auction funding operations expire at the end of December and will index future refinance operations. The beginning of the exit strategy and the indexing of the refinancing operation in theory paves the way for higher interest rates next year in the EU. Today's US unemployment report offsets the outlook for higher ECB yields as the data may allow the Fed to move the timetable for US rate hikes forward. It does not seem to be prudent to get too carried away with today's US jobs report as a number of the jobs are being created by the government and there are still over 15mln unemployed in the US.

Next week's EU economic calendar includes the December 7th release of December Sentix index expected at -5 compared to -7 last month. On December 9th in November German final CPI will release expected unchanged at 0.1%.

The technical outlook for the EUR is mixed as the EUR trades below 1.5000. Expect EUR support at 1.4800 November 20th low with resistance at 1.5091 the December 4th high.

091204_dailyfx_2

GBP
GBP traded mixed to higher supported by gains in cross trade to the JPY and EUR. GBP gains are attributed to report that the UK government will announce a plan to help increase the rate of public savings to help reduce the UK budget deficit, a rise in UK auto registrations and improving risk appetite as equity markets rally after the release of better than expected US employment data. GBP was also supported by speculation that the BOE will hold monetary policy and the level of asset purchases unchanged at next week's BOE policy meeting Thursday. The BOE policy meeting next week is the key event risk for GBP trade. The BOE is expected to hold monetary policy unchanged and the level of its asset purchases unchanged at £200bln. If the BOE elects to maintain the current level of asset purchases it would be a modest positive for the GBP.

Next week's UK economic calendar includes December 8th release of October industrial production expected at 0.9% compared to 1.6% last month. November BRC retail sales will also be released on December 8th expected at 2% compared to 3.8% last month. On December 9th November consumer confidence will be released expected at 73 compared to 72 last month. Also on December 9th October trade balance will be released expected at -7.349bln compared to -7.194bln last month. On December 11th November PPI will be released expected at 0.5% compared to 0.3% last month.

The technical outlook for GBP is mixed as GBP struggles to hold above 1.6600. Expect near-term support at 1.6395 the December 1st low with resistance at 1.6747 the November 25th high.

091204_dailyfx_3

CAD
CAD traded higher supported by report of better than expected employment data in Canada and the US. Canada reported an unexpected decline in its unemployment rate for November of 0.1% to 8.5% with employment gains of 79k. The Canadian unemployment rate was expected to rise to 8.7% with just 15k new jobs created. The improvement in the Canadian jobs data coupled with much better than expected US November unemployment report fuels demand for equities and generates speculation of a quicker economic recovery in North America. CAD gains were somewhat limited by weaker gold prices. Gold was hit hard by today's spike in the USD. The decline in gold was partly offset by a rally in the price of crude. Prior to today's employment reports in US and Canada most analysts had forecast that the Fed would remain on hold through 2010. Today's employment data may start to push US long-term yields higher and could spark speculation of an earlier than expected Fed rate hike. At the last BOC policy meeting the BOC said that it will maintain low yields through June of 2010 provided inflation remains in check. Canada's November Ivey came in slightly weaker than expected at 55.9, the consensus for the report was 60.

Next week's Canadian economic calendar includes the December 8th release of November housing starts. On December 11th October new house price index will be released.

The technical outlook for CAD has improved as USD/CAD trades below 1.0600. Look for near-term support at 1.0380 the October 21st low with resistance at 1.0780 the November 9th high.

091204_dailyfx_4

AUD
AUD traded lower despite improving risk appetite and better than expected employment data from the US and Canada. AUD was pressured by speculation that today's US jobs data may encourage the Fed to move the timetable for its withdrawal of stimulus forward. The Feds Bullard said that high unemployment may not preclude the Fed from tightening. Not only was today's US unemployment report better than expected but there were significant revisions to the prior month's nonfarm payrolls losses. The November unemployment report coupled with the revisions to the prior month's data will make it harder for the Fed to justify maintaining interest rates near zero for an extended period of time. If the US economy is recovering faster than has been expected the Fed may be confronted with the issue of whether ultra accommodative monetary is still warranted. A shift in focus to Fed policy outlook may reduce some of the support for the AUD from tightening of monetary policy by the RBA. Tuesday, the RBA elected to hike rates 25 bps to 3.75%. The RBA said that Australia's 2010 growth should be close to trend and inflation close to target. Wednesday, RBA watcher McCrann says that he expects Australian interest rates continue to rise in 2010. Today's report of Australia's retail and sales supports the outlook for higher Australian interest rates. Expect AUD to remain well supported on breaks.

Next week's Australian economic calendar includes the December 8th release of Q3 current account expected at -18.1 billion compared to -13.3 million last month. On December 9th October housing finance will be released expected at 2.5% compared to 5.1% last month. October investor lending and trade balance will also be released on December 9th. Investor lending is expected at 0.2% compared to -0.1% last month. The trade balance is expected at -3.57bln compared to a 0.23bln surplus last month. On December 10th November unemployment will be released expected at 5.7% compared to 5.8% last month with the participation rate expected at unchanged at 65.2% and jobs created at 15k.

The technical outlook for the AUD is positive as the AUD holds above 9200. Expect AUD support at 9105 the December 1st low with resistance at 9325 the November 26th high and 9400.