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Just as the dollar rally was starting to lose steam, the US employment report injected fresh energy and allowed a twelfth consecutive week of gains on the dollar index. Cable was pushed below September’s low to below the 1.60 level, whilst EURUSD came within a cat’s whisker of a breach below 1.25. USDJPY was under less pressure, moving towards, but not through the 110 level. Even though headline payrolls and revisions were positive and the rate was below 6.0% (for the first time since July 2008), there were less encouraging signs below the surface, such as the continued fall in the participation rate (a new cyclical low at 62.7%) and weaker than expected growth in hourly earnings. Both remain underlying headwinds for the US economy and also the government (in terms of raising tax revenues).

The challenge for the coming week will be for the dollar to sustain this momentum. There are no major data releases on Monday that are set to change sentiment in a substantial way. Aussie jobs data later in the week will be of particular interest, given signs of a shift in sentiment from the central bank towards the currency and also signs of more challenges for the domestic economy. Developments in China remain a focus for Australia and the Aussie could prove vulnerable if further weakness is seen in the latest China PMI data see on Wednesday. The UK rate decision is seen on Thursday, but this is low risk, with the greater focus on the minutes released later in the month and the possibility of another member voting for higher rates (two voted for such in September). Friday’s Commitment of Traders Report showed aggregate net USD positions increased even further as short JPY positioning increased for yet another week, with AUD and CAD net positions changing from long to short, reflecting the sustained dollar strengthening in spot. EUR shorts have been largely unchanged in recent weeks, indicating that traders may need to see some ECB initiative before increasing their shorts. In light of the uneventful ECB meeting last Thursday, it is unlikely that shorts will be increased for this reason on the next report, which is based on this Tuesday’s holdings.

Further reading:

EUR/USD Oct. 6 – Climbing up from 1.25 despite weak euro-zone data

GBP/USD: Trading the British Manufacturing Production