NZD/JPY

Fundamentals Set Aside: Aside from yesterday's extremely disappointing trade balance data, traders opted for the Kiwi/Yen cross in garnering further interest on the spread.  Although interest rate increase speculation is rising in favor of the Japanese yen, fact of the matter remains that the New Zealand short term interest rate is too good to pass up, currently at 6.75 percent.  Coupled with a zero percent borrowing cost on the Japanese yen side and you have yourself a pretty decent interest bearing instrument.

Central Bank Rate Increase Potential: Although New Zealand's economic growth looks to be slowing slightly, inflationary pressures loom heavily, prompting some in expecting further rate increase considerations by central bank Governor Alan Bollard.  With the responsibility of keeping price increases between 1 and 3 percent, Bollard may ultimately witness increases of 3.5 percent next year.  As a result, this may leave the head policy maker with his back to the wall as any cut considerations may prompt further hikes in price increases.

Technically Speaking: Slightly overextended after today's move, the cross currency looks to be hovering the first bottomside test at 77.98, 23.6 percent fib from the four day rise.  Any break below may be capped by the 31.8 percent fib at 77.64.  However, a move higher looks probable with Stochastic entering overextension.  Additionally the rise would see a test at resistance of 78.40.

USD/JPY

Yen Bears Dominate Session: Only one economic report was released during the session and it did little to dictate any price action in the underlying spot.  Reported on the day was the machine tool orders report.  In the month of August, the value of machine tool orders rose 5.4 percent according to Japan Machine Tool Builders Association.  Relatively in line with preliminary data earlier on in the month, the most recent figure represents the 36th straight increase with both domestic and foreign demand remaining healthy.  Although positive, traders disregarded the data after Federal Reserve President Thomas Hoenig signaled that further rate increases would be needed to tame price increases going into yearend.  As a result, with further speculation of rising U.S. interest rates, traders decided to increase holdings of dollar in order to perpetuate the carry trade notion. Currently, the trade would be yielding a 375 basis point differential as yen interest remains at zero.

Nikkei And JGB Selling: Adding to yen woes was further selling in the fixed income market along with profit taking on the equities side.  As traders pared back gains in equities, the bulk of conversion came from high name sellers of JGBs as interest rate increase expectations rise. 

Rumorville: Offers still reside at 113.60/65 with stops above at 113.73.  Exporter interest remain thin at this point as we break through the 113 barrier.  Tripping option related stops at 113, the underlying was able to rise above and maintain its lofty valuation.

Technically Speaking: As we have broken through topside resistance of the range, a retracement looks more probable as a death cross forms in the Stochastic oscillator.  First bottomside test will be the 23.6 percent fib at 112.41.

AUD/JPY

Similar To Other Yen Crosses: Much like other yen crosses, traders wanting to take advantage of the interest rate spread initiated long positions in AUDJPY.  Although slightly lower, the spread stands at 550 basis points, still a considerably profitable investment vehicle.

Economic Fundamentals: With the Australian economy remaining healthy, inflation is expected to accelerate mildly later on in the year, as consumption remains underpinned along with the housing sector.  As a result, with mention of a healthy banking and financial sector by central bank Governor Ian McFarlane, the currently neutral monetary policy seems to fit the current environment.  Ultimately, this places significant confidence in the hearts of traders as they are assured, albeit momentarily, that the current record high rates will remain intact.

Technically Speaking: Bouncing off of the 23.6 percent fib from the four day move, the underlying spot looks slightly overextended momentarily.  However, with the oscillator slightly overextended, further potential upside should not be ruled out.  Upside potential will see its first test at 85.80 where previous consolidation formed.

Richard Lee is a Currency Strategist at FXCM.