USD/JPY dropped over 100 points in European trade today breaking the 118.00 figure as macro fund selling drove the pair lower. With little economic news on the calendar, movements in FX were influenced by BOJ rumors and bond market dynamics. On the rumor front a newsletter advisory service suggested that the BoJ may hint at lifting the ZIRP in the near future at its board meeting this week. How accurate that information is remains to be seen as BOJ officials have been reticent at making any definitive assurances to the market. Last week  Deputy BOJ Governor Muto stated that the conditions necessary to end the qualitative easing have not been met yet sending the yen lower. 

Another, perhaps more interesting reason for yen's strength is the speculation about possible Japanese repatriation of funds ahead of the large U.S. coupon payments on Feb-15 ($23.9 billion worth). Furthermore, this week US will auction off nearly $48 Billion of debt, including the reintroduction of the 30 year bond which will float $14 Billion this Thursday.  With yield curve inverted across parts of the interest rate spectrum, market analysts have started to wonder if the Japanese will have much appetite for the product. With last month's auctions producing only mediocre results ( the 10 year TIPS elicited only a 1.48 bid-to cover ratio ) question now looms whether this week's debt load can be absorbed with ease.  Part of the reason for the poor showing last week was lackluster demand from Japanese lifers. Should that dynamic repeat itself this week the greenback may be in for a rough time as Japan represents the largest source of capital  for the US.

On the euro front the Industrial Production report missed badly with numbers printing -0.5% versus 0.7% expected. This was the second month in a row that the data  posted negative readings and although some analysts shrugged off the news as being relatively old, we are not as sanguine. Tonight's report  presents yet another disappointing data point from the region and suggests that Euro-zone economy may not be as healthy as some market players believe. Furthermore it puts additional pressure of the ECB to hold off rather than raise rates in March.  Given today's labor protests in France over PM Vallepin's reform legislation, the political risks of higher rates in the EZ may outweigh their economic necessity. The pair in the meantime was unfazed by the data, and the euro may indeed find more strength in the near term, but only in its function as the largest anti-dollar instrument. Meanwhile, the fundamental case for buying the currency remains decidedly weak.

Boris Schlossberg is a Senior Currency Strategist at FXCM.