US Dollar: Stronger Going into Payrolls
The rally in the US dollar today suggests that the optimism about Fridays non-farm payrolls release could be stronger than most economists and derivative traders may anticipate. The dollar strengthened for the fourth straight day against the Euro and the third day against the British pound and Japanese Yen. The current consensus estimate for payrolls is 100k while the latest payrolls derivative auction settled at 88.8k. Derivative traders are more pessimistic than economists, but the price action in the dollar suggests that currency traders may actually be looking for stronger job growth in the month of April. Given the dollars rally going into the number, we will probably need to see something in excess of 125k to see further dollar strength. Todays jump in the service sector ISM index and mild increase in the Monster.coms online job ads has triggered renewed optimism ahead of such a critical number. With the employment components of both the service sector and manufacturing sector ISM reports signaling an increase in hiring, there is a decent chance that non-farm payrolls could beat expectations especially since the 100k forecast is very low. However, traders should be particularly careful when trading non-farm payrolls because this is a report that can cause a great deal of volatility. The revisions are just as important as the headline. There are also plenty of reasons why payrolls could still come out weak, including the sharp drop in the ADP Employment index, the increase in layoffs according to Challenger Gray and Christmas and mounting jobless claims. Our Non-Farm Payrolls Preview contains more information on what is expected and how to trade this release. We anticipate a sharper reaction to a weak number than a stronger one since traders are buying up dollars ahead of the number.

Record Euro Value has Helped to Bring down Inflation
With fundamentals, technicals and sentiment lining up, it was not difficult to anticipate the latest turn in the EUR/USD. Not only has the strong Euro begun to put on a damper on growth, we are also seeing its effect on inflation. Producer prices increased by 0.3 percent in the month of March, which was right in line with expectations, but the annualized pace of growth slowed from 2.9 percent to 2.7 percent. European officials continue to be relatively nonchalant about the rise in the currency. EUs Alumnia said that over the last four years, euro FX has not caused suffering to exports. It is difficult to believe him when we have seen plenty of European exporters blame earning shortfalls on the value of exchange rates. Even though the currencys value may not affect the European Central Banks plans to raise interest rates again in June, it could affect whether rates will be raised beyond 4.00 percent. We will be looking for more cautious comments from ECB President Trichet at next weeks press conference. In the meantime, we are expecting Eurozone retail sales and service sector PMI tomorrow. Yesterday, manufacturing PMI fell short of expectations but remained at high levels. We expect a similar situation for the service sector. Eurozone retail sales have downside risk after the sharp drop in German retail sales reported earlier this week. Meanwhile Swiss consumer prices printed considerably higher than expected, with the month-over-month rate reaching its highest in over 15 years on rising energy prices. Such strong levels of inflation growth will keep the Swiss National Bank on track to raise interest rates.

Strong Housing Data Already Baked In, British Pound Sells Off
The British pound has remained steady against the US dollar while strengthening against the Euro and Japanese Yen. Even though we have been seeing disappointments in UK economic data, all of the readings remain at relatively high levels. Today, service sector PMI fell more than expected, but in the grand scheme of things, the 57.2 print is still very strong. The high level of the British pound is certainly contributing to the slower growth. We are keeping a close on eye on whether disappointments in economic data become a more serious trend, but for the time being, the Bank of England has no reason to reconsider their plans to raise interest rates next month. There is nothing of consequence left for release on the UK economic calendar. Monday is a holiday in London, which means that some traders will opt to take Friday off for the long weekend as well. With Japanese and Chinese traders also out for vacation, the case for a volatile and thin trading day tomorrow is even stronger.

Yen Based Carry Trades Continue to Move in Lockstep with the Dow
Japanese and Chinese markets were closed yesterday and will remain closed tomorrow. With the Dow setting another record high, yen crosses which are the carry trades have continued to perform well. Not only did the Dow post an all time high today, but the Nasdaq also hit a 6.5 year high while the S&P 500 topped 1,500 for first time since September 2000. The rally in US stocks is not giving up and if we end Friday strongly as well, the Nikkei could gap higher Sunday night.

USD/CAD Nears 7 Month Lows after BoC Dodge Downplays Intervention Risk
The recent trend in the commodity currencies continued to drive trading as the Australian and New Zealand dollars extend their sell-offs while the Canadian dollar continues to strengthen. The Reserve Bank of Australia is expected to release their monetary policy statement tonight. The futures curve is pricing in one rate hike this year, but this is not expected until the third quarter. The RBA statement will shed more light on whether they remain committed to a rate hike and the potential timing of one. The Canadian dollar is nearing its 7 month highs once again following comments from Bank of Canada Governor Dodge that the current level of the Canadian dollar does not necessitate intervention. Merger and acquisition flows are also fueling gains in the CAD with many resources hungry foreign companies snapping up Canadian firms. IVEY PMI is expected to drop significantly tomorrow, but CAD data loves to surprise to the upside.

Kathy Lien is the Chief Currency Strategist at FXCM.