After staging a modest rally against the dollar yesterday, the yen was hampered by mediocre economic data and once again moved above the 119 figure by midday Asian trade. Japanese unemployment for the month of October rose to 4.5% - far higher than the 4.2% expected suggesting that the job boom driven by the growth in the Japanese export sector may be cooling off. On the positive side Workers Household Spending for October rose 1.3% much better than -0.1% expected indicating that some of the recent growth may be finally filtering down to the consumer level.

Most analysts believe that Japan will not be able to shake off the clutches of deflation until Japanese consumer spending shows consistent strength. Tonight's report is a move in the right direction, but until energy prices collapse below the $50 handle Japan may be  quagmired in economic malaise and the yen, suffering from heavy carry trade sales, appears destined for the same fate. Though 120 was defended successfully yesterday we still believe that that target may be hit, especially now after news that the US Treasury did not name China as a currency manipulator and therefore removed any immediate pressure for further yuan revaluation which would have been helpful to the yen.

Meanwhile almost everyone was caught by surprise at the viciousness of yesterday's EUR/USD short covering rally which culminated in taking out the option barriers at the 1.1900 figure fully 200 points higher than when it started the day.  There were a thousand excuses for the move including the drying up of repatriation flows to US and the possibility of a 50 basis point hike from ECB. We find the later to be the most incredible supposition given the precarious state of EZ recovery and the fact that as tonight's French PPI data indicates that inflation ex-oil remains subdued. The near term trading story for EUR/USD  is much more likely to be written by the “USD” part of the pair. To that end, the market may be coming to a realization that the Fed tightening process is nearing an end, This week a slew of economic data will provide a much fuller picture of the  US economy culminating with NFPs on Friday. So far the Christmas shopping season data appears mixed as some surveys report record sales while other show a year over year decline. The old retail maxim is: as goes Black Friday so goes the season. Part of the currency market's latest tribulation may be the fact that most participants are not quite sure just how well the Christmas shopping season kick-off started.

Boris Schlossberg is a Senior Currency Strategist at FXCM.