• Yen Collapses as Traders Learn the Pain of Short Yen Trades
• High Expectations for Friday's Payrolls Rallies Dollar
• Another Rate Hike From Canada but Bias Uncertain

US Dollar
The market is very much in limbo at the moment as traders try to figure out whether the majors have the momentum to extend last week's sharp moves.  There are a lot of uncertainties this week with five central bank meetings along with the US trade balance and non-farm payrolls due for release.  The trade balance should not have much of an effect on the market unless it deviates from the consensus forecast significantly.  A wide trade deficit is something the market has grown accustomed to and we'll need a few more months of funding deficiencies before the concern for the trade deficit resurfaces.  Non-farm payrolls on the other hand are the real wild card.  Given the low level of jobless claims over the past few weeks, expectations are high for a good report.  Even though the consensus is currently for 210k jobs to have been created last month, the whisper number is as high as 300k.  Some argue that if jobs are strong, the Fed may be tempted to overshoot rate hikes, pushing the lending to rate to 5.25% or even 5.50%.  Although we think this is highly unlikely, the market is bearish dollars at the moment, betting on an end to the Fed's tightening cycle and any reason that casts doubt on their positions could result in some extensive position squaring.  In the meantime, the focus is first on the Bank of Canada and Reserve Bank of Australia's interest rate decisions tomorrow.   The Bank of Canada is fully expected to raise interest rates by a quarter of point to 3.75%.  Comments by Governor Dodge could seal the fate for the CAD for the next few weeks - hawkish comments could send the CAD back up to its 14 year highs while dovish comments could cement a near term bottom in the Loonie.  The RBA's decision is far simpler.  Having left interest rates unchanged for almost a year now, the central bank is expected to remain neutral once again.  

Euro
The Euro gave back some of its gains against the dollar today, but losses were limited thanks to the ECB's clearly hawkish bias.  ECB President Trichet was on the wires today reiterating many of the same comments that he made last Thursday.  With retail sales coming in firmer than expected on an annualized basis, the Eurozone recovery is still chugging along.  Retail sales rose 0.8% on a monthly basis and 0.9% annualized. The retail Purchasing Managers index weakened slightly from 49.7 to 49.6, which was disappointing at first glance, but it is still encouraging to see improved activity in France.  The market continues to price in a growing likelihood for more rate hikes with another quarter point of tightening already discounted.  Yet it is interesting that there is still a near 50-50 chance that we will see rates at 3.00% by year end.  Given Trichet's comments that interest rates "remain accommodative," the market should really be pricing in a higher chance of 2 more rate hikes.  However, traders could be treading carefully given the central bank's historically conservative nature.  A good argument against further rate hikes is given by one of our favorite economists, Nouriel Roubini on RGE Monitor.  He argues that the ECB may be threatening their own recovery by raising interest rates.  He says that even though data shows improving growth, the recovery is coming from a very low point (1.2% in Q4) and core inflation is actually falling.  He encourages the ECB to "sit back" until they see "stronger signals of a strong and resilient Eurozone-wide growth recovery before (they) tighten too much."  Roubini makes a good point, but the ECB is a central bank that adheres closely to its inflation mandate and their recent comments confirm that.  Therefore, it isn't likely that they plan on heeding Roubini's advice any time soon. 

British Pound
After briefly peeking above the 1.7600 level on Sunday night, the British pound gave back all of Friday's gains and then some.  Economic data out of the UK over the past few weeks has been very mixed, but we are still seeing signs of stabilization.  Most of the rally in the GBP/USD has been fueled by dollar weakness, but part of it can also been attributed to the acquisition mania that is happening in the UK.  Companies from Japan, China and now Germany have found UK companies particularly attractive acquisition targets.  Unlike many EU member states that have protectionism measures, Britain has liberal business rules that are open to acquisitions.  German firm Linde has announced plans to purchase Britain's BOC group for GBP8.2 billion, all of which will be paid for in cash while Vodafone is in talks to sell a part of its Japanese unit to Softbank Corp for approximately 1 trillion yen.  This follows a GBP 1.8 billion deal sealed by a Japanese company for a UK company last week.  If this acquisition spree continues, the British pound could remain well supported. 

Japanese Yen
The Japanese Yen was the day's biggest mover, selling off 1.0% against the dollar and erasing all of last week's gains.  Even though the Bank of Japan is going to be holding their most closely watched monetary policy meeting in years, traders are coming to the realization that even if the BoJ does raise interest rates, at most, the hike will only be by a quarter of a point, which would still leave Japan with one of the lowest interest rates in the world.  Traders are realizing how painful it is to be prematurely short USD/JPY.  With a negative carry of 4.50%, speculators are quick to stop themselves out in fear of paying more in interest than potential gains.  This is particularly true when USD/JPY was trading 116.20.  The 115.50-115.00 level serves as strong support, which suggests that even if USD/JPY was to continue to sell-off, the gains were limited.  Range trading could ensue at those levels, which would be even more pain for USD/JPY shorts.  However, at current levels, yen bulls could return, as short USD/JPY trades offer the opportunity between 117.60-115.50.  This opportunity will become even more attractive as the USD/JPY extends its rally. 

Kathy Lien is the Chief Currency Strategist at FXCM.