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Improved export data and a rising trade surplus in China did little to move Asian and European markets away from negative territory as it was overshadowed by the European Central Bank rate cut  on Thursday  and S&P’s downgrade to France.

For the month of October, exports climbed 5.6%, exceeding market estimates of 3.2%, and a stark improvement from Septembers 0.3% contraction.   China’s trade surplus rose to $31.6 billion in October, double that of the prior month.

Though exports rebounded, it will serve as a stark reminder to the Communist Party whose third plenary session of the 18th  Congress of the CPC Central Committee begins  on Sunday  that the government cannot simply rely on export demand and measures have to be enacted to boost the domestic economy.

The focus in Europe was the downgrade by S&P of France’s credit rating from AA+ to AA with its new outlook as stable, as opposed to a previous negative watch for the AA+ rating.

This was the second downgrade by S&P after the initial downgrade from AAA in January 2012 with S&P citing increasing risk to France’s economy and government finances as the reason for the downgrade.   This adds further pressure to President Hollande who has witnessed his approval rating slip to an all-time low for any leader at 25% to bring forth economic policies that will stimulate the French economy.

Labor conditions continue to deteriorate with unemployment reaching a new record of 3.3 million in October while the unemployment rate hovers around 11%.   France’s conundrum on one hand is that its fiscal arsenal is limited as they can’t increase already-high tax levels and on the other, they are unable to reduce total government spending.

The key event to end this trading week, undoubtedly, was the employment report from the US where 204,000 jobs were added to the economy and figures for September and August were also revised upwards for a combined 60,000.   The unemployment rate, however, edged up to 7.3% from 7.2% in September.

Analysts that have coined “Dectaper” or tapering in December is now back on the table, weighing on equity markets with the clear winner this morning being the greenback against its major counterparts.   Other data released this morning saw Personal income for September rise 0.5, unchanged from the previous reading and markets now await Reuters/Michigan Consumer Sentiment due out at  10:55 am.

The reaction to the non-farm payroll was swift with the euro under renewed selling pressure, now printing fresh lows on the day around the 1.3358 zone. The prospects for the euro are dim following Draghi’s acknowledgement that the euro zone faces a “broad-based and prolonged” bout of inflation below target.

Deflation’s impact to southern Europe can’t be ignored – it will be more difficult for them to cope with austerity. Technically for the pair of EUR/USD a close below 1.3357 could bring forth 1.3295 and then 1.3254.   On the flip side, resistance is seen at 1.3548, 1.33589 and 1.3591.

The loonie, followed in the same path of the euro, despite posting better than expected job figures, overshadowed by the US.   In October, Canada added 13,200 jobs and the unemployment rate remain unchanged at 6.9%. A violation of 1.0484 will see USD/CAD test 1.0506 and 1.0547.   On the downside, support is found at 1.0421, 1.0380 and 1.0358.

It is evident that as we head into year end and 2014, monetary policy from central banks will continue to drive foreign exchange markets.   Taking this into context, the Federal Reserve is considered to be more hawkish than other central banks as it looks to exit its quantitative easing program.

By  Cheryl Girling of  Cambridge Mercantile Group

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