The U.S. dollar and risk appetite stands to benefit significantly from today’s non-farm payrolls report. U.S. companies added 146k jobs in the month of November, exceeding the estimates of the most optimistic analysts on Wall Street. Between Hurricane Sandy and Fiscal Cliff concerns, the market was looking for an addition of only 85k jobs. However the Bureau of Labor Statistics saw no substantial impact from the storm and retailers added more workers ahead of the holiday shopping season. The icing on the cake was the unemployment rate, which dropped to 7.7%, its lowest level since December 2008. The closely watched U6 underemployment rate also fell to 14.4% from 14.6% while average hourly earnings increased by 0.2%.

The positive surprise in both the establishment and household surveys will allow investors to overlook the 33k downward revision to October payrolls and the 350k contraction in the workforce. With today’s hot labor market report, there will be no need for investors to look past Sandy’s effects even if it is possible that the storm’s impact could be delayed or seen in future revisions. What is important right now is that the labor market is on firmer footing going into next week’s FOMC meeting. The real question to is whether the strong non-farm payrolls report will stop the Fed from announcing additional asset purchases next week to replace Operation Twist, which expires at the end of the year and we believe that it won’t. The Fed’s concerns about the labor market runs deep and with the Fiscal Cliff still in background, they won’t want to risk leaving the economy with even less stimulus going into the New Year.

Up North, labor market conditions also improved significantly in Canada. More than 59k jobs were created in the month November, driving the unemployment rate down to an 8 month low of 7.2%. Earlier this week, the Bank of Canada decided to maintain their hawkish monetary policy stance and many investors including us questioned their thinking because of weak manufacturing activity, growth and retail demand. Today, their decision has been vindicated by the solid labor market report. Nearly all of the job growth was in full time employment, which is exactly what the central bank wants to see and this should pave the way for a recovery in demand going forward. Solid job growth in the U.S. and Canada should fuel further gains in the Canadian dollar with 98 cents being the next level of support for USD/CAD.