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The initial market reaction to the August jobs report was straightforward, with the US dollar and yields getting knocked down, but it did not last, explains Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

An unexpectedly soft U.S. employment report could not hold down the US dollar on Friday.

While nonfarm payrolls slightly exceeded forecasts in August, revisions showed that employment growth in July and June was much weaker than previously reported.

Wage growth moderated as well, solidifying market expectations that the Federal Reserve will forgo raising interest rates this month.

The implied probability of a rate increase in September has fallen to about 7% in the aftermath of the employment data, from around 20% last week.

The initial market reaction was straightforward, with the US dollar and yields getting knocked down, but it did not last.

Once the dust settled, long-dated Treasury yields stormed higher again, which translated into dollar strength.

It’s difficult to say what was behind this reversal, although rising oil prices and a stronger ISM manufacturing survey certainly helped.

Looking ahead, the outlook for the dollar seems increasingly favourable. The American economy is already in better shape than the Eurozone’s and the recent spike in energy prices could further exacerbate this divergence, hitting euro-dollar in terms of growth differentials and trade flows.

Hence, the only missing ingredient for a full-scale US dollar rally might be a period of risk aversion in equity markets.

Meanwhile, in China, a series of targeted stimulus measures seem to have finally done the trick in restoring some confidence among investors.

Beijing stepped up its support for households and property developers last week by announcing tax breaks for child care and education spending, while also relaxing restrictions on home purchases.

Even though all the stimulus announcements so far appear to be half-measures, the fact that the list is growing larger every week has started to fuel hopes that Chinese economic activity could begin to bottom out soon.

This cautious optimism was reflected in commodity markets last week, with industrial metals and energy prices staging a furious rally.

Oil prices hit their highest levels since November, as the prospect of an improvement in demand tipped the scales in a market where major producers have been closing the supply taps for some time now.

Similarly, shares in Hong Kong advanced and currencies exposed to China through trade, such as the Australian dollar, enjoyed some upside.

One exception was the Canadian dollar, which could not capitalize on its classic correlation with oil prices and instead fell sharply after incoming data revealed that the economy unexpectedly contracted in Q2, shattering hopes of any further Bank of Canada rate increases.

Gold prices displayed striking resilience on Friday, managing to close the session almost flat despite the spike higher in real yields and the resulting appreciation in the US dollar, which are usually detrimental for the precious metal.

There might be an element of gold getting caught up in the broader China-fueled commodity rally, or perhaps sovereign purchases by central banks continue to underpin demand. Either way, it’s encouraging that bullion has not fallen victim to the latest bond and FX market moves.

That said, there is still much work to be done before the technical picture turns positive again.

An original version of this article can be found here.