• USD/JPY -1.2%
• GBP/JPY -0.8%
• EUR/JPY -1.1%

USD/JPY

Fukui Sparks Rally: The Japanese yen strengthened on the day following comments made by Bank of Japan Governor Fukui.  Citing that the benchmark rate decision would not be made in reflection of a yuan revaluation, the governor suggested that rates may now be on the way up as deflationary pressure dissipates and inflationary pressures are sparked on rising growth prospects.  Pushing the currency pair lower on the session, current momentum may not be sustainable as the probability of a hike before the second half of 2006 seems far away at best.  As a result, tomorrowââ,¬â"¢s department store sales will weigh on the market, more heavily than before, as it would further todayââ,¬â"¢s momentum.  Proving that the consumer is alive and strong in the economy, a better than expected report should lend to rising anticipation of a quickened decision by the central bank.

GBP/JPY

Carry Trades Out Of Style: In light of the increased demand on the British pound major, the GBPJPY cross was unable to benefit as Japanese yen fever hit the market.  This remains relatively interesting as traders comparatively bid the sterling major higher on expectations that the current 4.5 percent repurchase rate looks to stay, on better than expected economic conditions in the United Kingdom.  And why not, the once dour housing sector has seemingly rebounded as manufacturing activity ticks higher and inflation remains alerting to central bankers.  All this coupled with a merchandise trade surplus that shrank considerably in the month for the Japanese.  Dipping into a deficit for the first time in five years, the trade balance shifted into negative territory as import valuations soared, worse than expectations.  What is driving the cross seems to be, not only increased yen demand, but a notion that carry trades may ultimately shift out of style.  The yen base currency, the foundation for some of the most profitable carries of the past two years, may undertake a different tone as it becomes apparent that central bankers are likely to increase interest rates.  This more than anything may fuel further downside in the pair as we have seen plenty of unwinding in the Kiwi and Australian major carries as well.

EUR/JPY

Euro Data Casted Aside: Euro data was ignored in similar fashion to the GBPJPY as confidence by both businesses and consumers rose to the highest levels in some time.  Business confidence as portrayed by the Ifo institute climbed to a 14-year high as consumer confidence in the German economy jumped to an 11-month peak.  Both beneficial for the economy, the better than expected reports lend to further speculation of a rate increase when policy makers next convene in March.  However, still troubling, the data conflicts with dour data that has been witnessed over the past couple of weeks, lending to a bit of confusion in the underlying spot price.  Given the downside export figures and lower growth prospects for both France and Germany, tomorrowââ,¬â"¢s German consumer price index figure may prove rather important.  Should the report be released higher, inflationary suggestions would remain the sole justification for a central bank hike.  However, a dip would contribute to the current theme of mixed sentiment and keep the current range of 1.1850-1.1950 intact.

Richard Lee is a Currency Strategist at FXCM.