As is so often the case in the currency market, it was more than ironic that the yen hit a 26 month low against the dollar reaching 117.78 in Asia trade on the same day as Japanese Household spending * a key measure of the country's  battle with deflation * actually rose for the first time in 8 months.  But at present the market cares not wit for Japanese economic data as the single minded focus of most participants is yield, yield, yield! With US rates expected to rise to 4.5% within two months, the 450 basis point carry simply trumps all other trading considerations.

Still the question of whether USD/JPY is seriously overbought needs to be considered. Our internal Speculative Sentiment Index says no, as traders continue trying to pick the top to the tune of 3 yen longs for every dollar long. The Commitment of Traders Report from CME says otherwise, however. That data sample shows speculative yen bears at near record highs * levels that have previously coincided with a turn in the pair. Who is right? Perhaps both. We may still see a final gasp near term spike in USD/JPY that will stop put the last of the die hard yen bulls,  followed by a much needed price correction in the pair sparked most probably by lower oil prices.

Speaking of sentiment measures our EUR/USD positioning now indicates a 3 to 1 ratio of euro longs to dollars longs * a rare occurrence that in the past has almost always led to further declines in the EUR/USD.  With US NFP projected to print at 122K in comparison to last month -35K drop,  along with  continued unrest in France and rather lukewarm comments regarding rate hikes from Mr. Trichet, the euro appears to be headed to a test of the 1.1800 figure.  Putting the two data pieces together, perhaps the best bet is away from the majors and on to the crosses where the EUR/JPY is coming off its yearly highs at the 141.00 level and may see more weakness ahead.

Boris Schlossberg is a Senior Currency Strategist at FXCM.