US Dollar
Even though US traders are back at their desks today, currency prices have barely moved with Europe still closed for Easter Monday. Today’s lack of volatility is a testament to how significant European volume is to day to day market activity. London is and has long been the financial center where the largest amount of FX volume is dealt. US traders have expressed their bias by taking the dollar slightly higher, but they could be holding back any aggressive positioning until their European counterparts return to their trading desks tomorrow. The biggest development in the markets today is the sharp drop in oil prices. Traders have shrugged off Iran’s announcement that they plan on starting “industrial-scale” enrichment of uranium to focus on surging supply. After hitting a year to date high of $68 two weeks ago, oil prices have trended lower, with the latest wave of weakness lasting for six consecutive trading days. Although this could ease some of the Federal Reserve’s concern about inflationary pressures, members of the central bank’s policy making committee will most likely stick to their hawkish bias as the stock market hovers around six week highs, the labor market continues to tighten, and the overall housing market holds steady despite the problems in the sub-prime lending sector. Only a few of the Fed Presidents are scheduled to speak directly about the economy and monetary policy this week. Fed Presidents Mishkin, Plosser and Fisher are scheduled to speak tomorrow. Mishkin will be talking about “Monetary Policy and the Dual Mandate” while Fisher and Plosser will be talking about the Fed’s “Credibility and Commitment.” Mishkin is the only one of the three that is on the Fed’s Board of Governors; both Fisher and Plosser are non-voters. Aside from the Fedspeak, there is no data of consequence on the US calendar. The minutes from the Federal Reserve meeting held in March is due on Wednesday and we will touch more on that in tomorrow’s Daily Fundamentals.

Euro
German, French and Italian markets all remain closed today for Easter Monday, but this is most likely the calm before the storm as the biggest event risk this week is in the Eurozone. Our center focus is the European Central Bank’s monetary policy meeting on Thursday. The ECB is not expected to change interest rates, having only lifted them last month. However with the central bank still on track to raise interest rates in the second quarter, the comments by central bank President Trichet will be particularly important. A look back at Trichet’s changing language between the last two rate hikes in December and March may shed some light on what Trichet will say at the upcoming meeting. Before the most recent rate hike in March, Trichet raised rates in December 2006. At the December meeting, after raising rates, Trichet was optimistic, but intentionally dropped the words “strong vigilance” from the comments that he made in the accompanying press conference. He reconfirmed that he has not used the words “strong vigilance” in any of his comments at the January meeting and rates were left unchanged in both January and February. At the press conference after the February meeting, Trichet reintroduced the words “strong vigilance,” paving the way for the quarter point tightening that we saw in March. This suggests that if Trichet plans on raising rates in May, then he could reintroduce the words “strong vigilance” this Thursday. Anything otherwise would indicate that he wants to delay a rate hike to June. Meanwhile EUR/CHF continues to perform strongly with the currency pair reaching the highest level since the introduction of the Euro this morning. This also marks the ninth consecutive day of strength for a currency pair that typical range trades. Since the launch of the Euro, we have never seen a rally in EUR/CHF last for longer than nine trading days. The last time we saw nine straight days of strength was back in December.

British Pound
Since the Bank of England left interest rates unchanged last week, the British pound has fared poorly against the US dollar and Euro. More specifically, the pound has already seen three consecutive days of weakness against the US dollar. With little economic data of consequence this week, it will be difficult for the currency to find support unless we see a wave of dollar bearishness when European traders return to the markets on Tuesday. Like the Eurozone, the UK was also closed for Easter Monday today. BRC retail sales are due for release tomorrow. Stronger sales could lead to a brief recovery in the pound.

Japanese Yen
The break higher in the Japanese stock market (Nikkei) has helped the Yen recover some of its losses against the Euro, Swiss Franc and British pound. The only currency that the Yen lost ground against was the Australian dollar; it remained virtually unchanged against the US and New Zealand dollars. The weakness in the Yen over the past few weeks reflects the market’s belief that the Bank of Japan will not stand in the way of carry trades. The central bank will be announcing their monetary policy decision tonight and rates are expected to be left unchanged at 0.50 percent. Deflation is rearing its ugly head again as the latest consumer price figures from Tokyo report their first drop since May of 2006. This may be temporary, but even if it is, the central bank will find it difficult to justify a rate hike in an environment where inflation is falling and retail sales remains weak. BoJ Governor Fukui has a press conference scheduled after the rate decision. Even if he is optimistic about the outlook for growth, he will have limited flexibility to be proactive rather than reactive.

Commodity Dollars (AUD, NZD, CAD)
Commodity currencies are looking heavy and overextended despite the rise in the Australian dollar today. Both the Aussie and Kiwi have been unable to rally beyond their swing highs and a break below today’s low would open the door for a test of critical support. Gold prices are lower, which is contributing to the weakness, but the bigger story today is the Canadian dollar. Oil prices have been falling for the past 6 trading days and we are finally seeing a reaction in the Canadian dollar. With no CAD data on the calendar tomorrow, we could see an even further extension in today’s USD/CAD rally.

Richard Lee is a Currency Strategist at FXCM.