FOREX UPDATE - USD

The US dollar rallied on Friday on the back of the payrolls report, and the gains were evenly distributed against most other major currencies. EURUSD traded to a low of 1.2683 from 1.2795, while USDJPY traded from 116.95 to a high of 118.18. Meanwhile US 2- and 10-year Treasury yields surged by 15 and 12 bp respectively as the market scaled back prospects of Fed easing next year.

Non-farm payrolls for October rose by +92k, less than market expectations of +123k. However, markets focused on an upward revision to September data, now estimated at a +148k gain, versus the earlier estimate of +51k. Also, the unemployment rate dipped to 4.4% from 4.6% in September, and is now at its lowest level since May 2001.

Also, the non-manufacturing ISM for October came in firm at 57.1, versus expectations for 54.9 and well above September's 52.9.

The US goes to the polls on Tuesday and the markets will keep an eye on the results, with Democrats expected to capture control of the House and potentially take the Senate as well.

While we think this would be viewed as moderately USD-negative due to concerns about less progress on free trade and headline risk from high profile hearings, the impact should be marginal and we would not expect a big knee-jerk reaction to the results.

On the US data front, September trade data due Thursday will be of interest, and we expect some moderation from August's record deficit, largely due to lower oil prices.
With the strong payroll report last Friday making markets unlikely to price near-term Fed easing, and the carry trade environment looking healthy, we see scope for the US dollar to trade well in the near term.

Todays Economic Activity Chicago Fed President Moskow speaks on the US economic outlook at 1345 GMT. There are no major US economic releases scheduled.