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Investors overjoyed at seeing green shoots after a brutal

Global markets are in a state of euphoric upheaval this morning, after US non-farm payrolls increased by 175,000 in February, blowing away expectations that had been set below 150,000. Investors are overjoyed at seeing green shoots after a brutal winter that severely impacted economic growth in the world’s largest economy.

The euro is holding ground near a two year high, after the European Central Bank demolished interest rate cut expectations at its meeting yesterday. At the press conference after the announcement, Mario Draghi suggested that the institution saw little need to provide additional stimulus – and went farther, calling the euro area an “island of stability” in the global economy.

The move gained steam this morning, when the Bank released numbers showing that banks were set to repay emergency loans faster than previously forecast. For traders, this means that European money supply is constricting, increasing scarcity and raising the currency’s value on global markets.

Equities and most commodities remain well bid, as asset managers position ahead of an expected rebound in commercial demand, and geopolitical concerns ebb.

In contrast, the Canadian dollar saw an incredibly violent snapback after the national statistical agency reported that employment numbers had fallen by 7,000 position in February. This surprised markets that had expected a stronger report, and starkly illustrated a widening disparity with the United States.

This came after the currency smashed through the 1.10 mark yesterday, propelled upward by a spectacular rise in residential building permit values. Builders requested approval for more than $4.6 billion dollars in new construction last month, amounting to a 26% increase over December.

Arguably, housing permits could be seen as something of a lagging indicator, but the scale of the move would suggest that household spending levels should remain relatively robust over the near term. This raises the possibility that we’ll see brief upward moves as consumption-related data is released in the coming months – potentially helping to offset the employment weakness that has emerged.

However, we would suggest that the fundamentals are not supportive of a sustained move higher. Canada’s external competitiveness remains severely constrained, and the housing market’s gains look increasingly fragile, particularly when compared internationally.

The 1.10 mark has become Canada’s 49th parallel, meaning that we’re likely to remain well north of it – except for brief shopping trips.

Further reading:  Draghi’s failure to take action sees the euro rally, and the AUD is a big winner

Karl Schamotta

Karl Schamotta

Director, FX Strategy and Structured Products at Cambridge Mercantile Group.