US Dollar
It is non farm payrolls week and as usual traders should be prepared for some decent volatility in the currency market. Unlike other weeks when NFP is due for release, this week, we have exceptionally thin trading conditions. Japanese traders have closed their books to enjoy their Golden Week holidays while German, French and Swiss traders are off tomorrow for Labor Day. This indicates that volatility could be even greater than usual especially in reaction to any incoming data that will shed more light into Fridays non-farm payrolls release. We will be paying the closest attention to the employment components of the service and manufacturing sector ISM reports. Today, Chicago PMI fell short of expectations with the index slipping from 61.7 to 52.9. The underlying details reveal that much of the weakness was concentrated in new orders, which snapped back after a sharp jump in March. Both the prices paid and employment components improved, which supports stronger job growth, at least in the manufacturing sector. With manufacturing ISM due for release tomorrow, we took a look back at the Empire State and Philadelphia Fed surveys released earlier this month. The readings of both reports remain at very low levels, but unlike the Chicago PMI, the Philly Fed index was unchanged in April while the Empire State manufacturing survey improved slightly. The prices paid of both reports accelerated while the employment component remained virtually unchanged for the Philadelphia region, but deteriorated significantly in the NY region. Taking this information into context, the ISM manufacturing index should either remain unchanged or slip modestly. How the dollar will react will be contingent upon where the biggest surprise lies. Prices paid should see a nice jump since it increased in all 3 of the regional indexes. The employment component on the other hand should remain close to the 50 boom/bust level. When it comes to the ISM, there is always more than meets eye, so all traders should look at the details just as closely as the headline number. Meanwhile Chicago PMI was not the only disappointing number released today. Inflation figures were slightly softer. Even though the annualized pace of growth in the PCE deflator increased, the annualized growth of core prices fell. Personal spending also increased a modest 0.3 percent compared to 0.7 percent growth the prior month. The only piece of good data that we had today was personal income, which grew by 0.7 percent. The spending and income numbers reveal more normalization of consumer spending habits. This is a nice shift away from the prior habit that consumers had of spending more than they earned.

Euro
Despite a sharp drop in German retail sales this morning, the Euro ended the day only slightly lower against the US dollar. It appears that the Value Added Tax increase is finally taking a meaningful bite out of consumer spending. Originally expected to rise by 0.8 percent, spending actually dropped by 0.7 percent in the month of March. In contrast to the German Gfk survey reported last week, the Eurozone consumer confidence release revealed no improvements. Furthermore, the flash CPI estimate for the month of March was 1.8 percent compared to 1.9 percent the prior month. Offsetting that release of course was the higher than expected money supply growth. Either way, we are finally seeing holes in the Eurozone growth story and this poses a big risk for further Euro strength in the months to come. When the EUR/USD hit an all-time high back in December 2004, the reversal was triggered not by commentary from ECB officials, but instead by back to back disappointments in economic data. Traders should not forget that the strong Euro does significant damage to export dependent countries within the Eurozone and just because the economy is stronger this time than in 2004, doesnt mean that it will go unaffected. We continue to look for more disappointments. Should German unemployment also surprise to downside this week, then we could see a serious turn in the EUR/USD. Since the European markets are closed tomorrow, there will be no data released.

British Pound
The British pound is stronger across the board today thanks to an improvement in the consumer confidence and increase in mortgage approvals. With the housing market holding steady, it is no surprise to see that households are less pessimistic about the outlook for the economy. This week, we have a ton of additional housing market reports due for release including Hometrack house prices tonight and the HBOS PLC house prices tomorrow. Like the report released by building society Nationwide last week, both of these reports are expected to show improvements. In addition to the housing reports, we are also expecting manufacturing sector PMI and CBI Distributive Trades survey. These two numbers are the bigger market movers tomorrow as the market expects the strong British pound to put a damper on manufacturing sector activity.

Japanese Yen
Golden Week in Japan has begun and we are already seeing some profit taking in the Yen crosses. Last week we had talked about the price pattern of USD/JPY around Golden Week. In 7 out of the past 10 years, USD/JPY has sold off either the week leading up to or the week of the holidays. Since we did not see selling the week leading up to Golden Week, then there is a strong possibility we could see USD/JPY weakness over the next few days. In addition, end of day selling in the Dow has also put pressure on the yen crosses. We have pointed out that carry trades have been very closely correlated with the performance of the stock market and this relationship has manifested itself again today. There was no Japanese data released overnight. We have labor cash earnings due out this evening, which should report an improvement even though earnings remain soft overall.

Commodity Dollars (AUD, NZD, CAD)
The Canadian dollar hit a fresh 7 month high against the US dollar thanks to strong February GDP numbers. The downtrend in USD/CAD is powerful and the move has both fundamental and technical backing. We have inflation figures due out of Canada tomorrow, but the market will be paying far closer attention to Fridays IVEY PMI number. The Australian and New Zealand dollars on the other hand are lower even though Australian private sector growth was stronger than expected. New Zealand data disappointed with building permits slipping and money supply growth slowing. This is a clear indication that the high interest rates and strong currency is having a negative impact on the economy.

Kathy Lien is the Chief Currency Strategist at FXCM.