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The stronger than expected U.S. trade numbers helped to ignite a sharp rally in the U.S. dollar. The trade deficit in August was $30.71B compared to -$31.85B the previous month.   Imports dropped but exports rose for the fourth straight month in a row.  The weakness of the U.S. dollar has certainly contributed to the improvement in trade even if the increase in exports was marginal.  The most notable improvement in trade was with Europe as the U.S. trade deficit with that part of the world shrank close to 50 percent.  This shift reinforces the idea that export demand is helping to fuel the recovery for many countries. .   The dollar’s reaction to the trade numbers suggest that fundamentals may finally matter again for the greenback.

Canada is Where All the Action is

However even though the U.S. trade number is interesting, the big story in the currency market today is the Canadian dollar.  The loonie soared to a fresh 1 year high against the U.S. dollar after the much stronger than expected employment numbers.  For our readers, the hot report should not be much of a surprise since we said yesterday that "given the sharp rise in the employment component of IVEY PMI, we believe that not only could job losses be minimal but there is a good chance that Canada experienced positive job growth for the second month in a row. A strong labor market report should add to the upside momentum in the Canadian dollar and send it a fresh 12 month high against the greenback."  Job growth in September was the strongest since the Spring which reflects the relative outperformance of the Canadian labor market with that of the U.S.  The unemployment rate also fell for the first time in over a year from 8.7 to 8.4 percent.  When you have a country like Canada experiencing larger than expected job growth and another experiencing larger than expected job losses, you can imagine what the trend of the currency pair will be going forward. However not all news was good news for Canada this morning.  The trade deficit in Canada hit a record low in August as exports plunged 5 percent.  Imports also fell but not as aggressively as exports. Weaker demand was seen in most products but agriculture and machinery took the biggest hit.  Although we are worried about the trade numbers, we do not believe that it will erase the upside momentum in the Canadian, but we will become very worried if trade fails to recover in September.  Meanwhile if USD/CAD closes below 1.05 today, there is no major support in the currency pair until parity.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.