The yen rallied a bit on the back of hawkish comments by the deputy governor of Bank of Japan Kazumasa Iwata, firmer manufacturing PMI data and strong resistance to the 120 level by spec traders protecting option barriers. Mr. Iwata, stated that he would prefer to see the end of BOJ ' s ultra accommodative zero rate interest rate policy in the near future. However, he noted that the change in policy is likely to be gradual and given very  strong political resistance from Japanese political leaders, the monetary authorities are unlikely to unilaterally make the move anytime soon.

On the economic front Japanese Manufacturing PMI printed at 55.3 well above the 50 boom/bust level and at an 18 month high. The news suggests that the lower yen is keeping the Japanese industrial sector humming on all cylinders, which should translate into better GDP growth in Q4 of 2005. Additionally Japan's housing starts and construction orders jumped by 9.6% and 0.6% respectively, offering further proof of economic renaissance in the land of the rising sun. The yen however, shrugged off most of the good news and by early European trade was trading near the lows of the day. The unit continues to be pressured by carry trade sales and more importantly robust data out of the US which has the market now thinking 4.75% rates as we move into the start of 2006. Some analysts have noted a huge dichotomy between the performance of the Nikkei which briefly hit a five year high of 15,000 today and the ever declining path of the yen, wondering just how long such disparity can last.  Although eventually the yen will have to firm as the Japanese equities continue to rise for now it appears as though the divergence may have more room to go.  

The euro meanwhile essentially stayed in place  as most of the European data printed in line with expectations. EZ GDP registered a 1.6% increase - a marked contrast to the 4.1% gain in US GDP. However, with dollar positive expectations so deeply ingrained in the market we wonder if the good news will have much of an impact on the greenback.  The buck appears to be the victim of its own good press as traders seek better and better data to justify further dollar longs. We still maintain that the NFP on Friday may set the tone of trading until the holidays, as that report must produce strong results in light of the fact that employment data for the past three months has been sub-par.  If the NFPs disappoint  they may affect everything from future interest rate policy to consumer sentiment but if they confirm the bullish thesis, EUR/USD could trace out new yearly lows. In the meantime the EUR/USD appears content to consolidate.

Boris Schlossberg is a Senior Currency Strategist at FXCM.