NFP Bounce Trounced by Downgrades

The optimism generated from strong jobs reports in the US and Canada failed to sustain positive market sentiment. CHF and EUR lagged while GBP and AUD led gainers on Friday. The weekly CFTC data showed a pullback in USD longs after several weeks of aggressive gains.

Non-farm payrolls gained 103K compared to the 60K expected and prior reports were revised higher, adding about 100K jobs. Despite the hiring, the unemployment rate remained at 9.1%. Risk trades jumped to session highs shortly after the data.

CAD surged after Canada added 60K jobs in September and the unemployment rate fell to 7.1% from 7.3%. USD/CAD fell as low as 1.0240 but rebounded to close nearly unchanged on the day at 1.04 in a demonstration of the markets strong appetite to sell commodity currencies.

EUR/USD surged to a session high of 1.3520 but slumped after the European close to 1.3380 on a wave of downgrades of sovereigns and banks. Fitch lowered its ratings on Italy to A+ from AA- and Spain to AA- from AA+. The outlooks for both remain negative. Fitch further said that Portugal remains on review for a downgrade. Not to be outdone, Moodys placed Belgiums Aa1 rating on review for a downgrade, while cutting 12 UK banks and 9 from Portugal.

The threat of downgrades will continue to be a chief EUR risk after Moodys said earlier this week that all but the highest-rating European sovereigns are vulnerable. Of course the top EUR risk would be a failure of Greece to receive the upcoming round of Troika aid. Some of the first signs of displeasure emerged from the IMF regarding Greeces efforts to lower their deficit when leader Borges said the fund is unhappy with the pace of privatization.

The S&P 500 fell 0.8% to 1155. Crude edged higher while gold gained $14 to $1637.

Weekend headlines are likely to focus on the China currency manipulation bill ahead of the Oct. 11 vote in the Senate. On Friday, House speaker John Boehner has said he wont allow the Republican-controlled chamber to vote on the bill, saying it could spark a trade war with China.

Weekly Levels

On the week, AUD was the top performer while CHF lagged but overall moves were relatively mild, especially in the context of recent weeks.

The EUR/USD weekly chart posted a doji star and this sometimes signals a rebound but we are hesitant because of repeated failures at higher levels and negative weekly reversals. The next tranche of Greek aid WILL BE DELIVERED and shorts will hesitate to be aggressive ahead of this risk event.

The GBP/USD chart displays a similar doji star pattern but given the BEARISH news from the BoE, there is a greater possibility of rebound that is sustained.

The EUR/GBP chart is particularly interesting given the juxtaposition between the BOE and the BULLISH surprise from the ECB. In light of this, the chart failed at higher levels and closed only slightly higher. This chart could break down in the week ahead and there is the possibility of large losses below 85.27.

Commodity currency charts point to consolidation in the week ahead while CHF appears posted for another leg lower. The USD/JPY points to more of the same.

Commitment of Traders

Fridays CFTC data showed the net USD long slip to $13.77B from $14.38B in the week ending Oct. 4. Euro (-82K), yen (+42K) and sterling (-64K) positions were virtually unchanged on the week. Specs appear to finally be abandoning the CHF as it slipped to a negative 1K from +2K a week earlier. The CAD net short fell 5K to -15K while AUD longs bounced to +12K from +5K and NZD longs slipped to 5K from 9K.