USD/JPY plummeted more than 100 points in Asian and early European session tonight as Japanese wholesale prices rose 2.7% from a year ago - their fastest increase in more than 16 years. Trading was also affected by technical flows as IFR markets reported that a slew of 119.00 options as far as the eye can see (with expiry dates every day this week) may have helped push USD/JPY lower.  On the fundamental front however, not all news was positive as Household Spending once again contracted in January, decreasing -0.7% against expectations of 1.2% rise. Furthermore delving deeper in the CGPI data analysts noted that most of this month's gains were driven by rise in energy costs and that the run rate in corporate goods price increases for the past three months actually slowed to 1.9% - decidedly less than the 2.7% headline number reported today.

Nevertheless yen bulls had their excuse to push the pair lower and it collapsed more than 130 points within just 4 hours. However, longer term traders betting on imminent change in BOJ quantitative easing policy may be engaging in wishful thinking. As we've noted many times in the past, it is the consumer not the corporate sector that has the attention of Japanese monetary authorities. With Household spending remaining weak and Eco Watchers survey dropping by the biggest amount in 19 months the BOJ is likely to tread very carefully before making any policy changes that could damage the country's fragile recovery.

All of this price action brings us to another point. Regardless of the fundamental news and technical factors that may push the pair up or down, the one key fact to emerge at the start of this year is that USD/JPY will be a much volatile instrument in 2006. With US rates expected to rise to 4.75% or possibly higher and Japanese rates still at 0% USD/JPY has become the preeminent carry trade in the currency market. This influx of speculative flow into the pair will likely create exaggerated moves in either direction as speculator sentiment shifts one way or the other. For those traders participating in the move, buckle up your seat belts, its likely to be a bumpy ride.

In Europe, the EUR/USD failed in both attempts at scaling the 1.2000 barrier and dropped back to the 1.1960 level as France - the sick man of the region - reported disappointing news all around. Industrial and Manufacturing production both contracted in contrast to expectations of a rise and GDP grew at anemic 0.2% vs. projections of 0.4% gain. High oil costs were the primary culprit for the slowdown, but it is becoming clearer by the day that EZ' s second largest economy is in dire need of reform as the sclerotic government in Paris is unable to create any forward momentum. With Germany unable to single handedly pull the region out its chronic malaise the EUR/USD will have a hard time rising against the greenback on a fundamental basis and will only do so in response to heavy anti-dollar sentiment. This brings us finally to today's US Trade Balance figures. With the number expected to reach -$65 Billion, the greenback may see some weakness on the news, however, unless and until the TICS report of foreign capital inflows (out next Wednesday) begins to show a gap in financing, the Trade deficits worries may take a back seat.

Boris Schlossberg is a Senior Currency Strategist at FXCM.