Yesterday, we wrote, “With Japanese employment, spending and wage data all due to be released in the next 48 hours, the currency market should be able to get a much better understanding of the country’s current economic state. If wages finally begin to rise while overall household spending records its fourth positive reading in a row, sentiment towards the yen may slowly shift as traders begin to price in the possibility of another 25bp rate hike this summer. With the Japanese currency so grossly oversold any upside surprise could finally trigger some profit taking in the USDJPY pair. After three months of uninterrupted one way price action and so many players long the carry trade some adjustment is long overdue.”

Today’s strong Japanese employment and spending data was just the cure for the long ailing yen bulls as it demonstrated that the country’s recovery is finally filtering down to the consumer. Unemployment reached a 9 year low, dropping to 3.8% from 4.0% forecast while overall household spending skyrocketed 1.1% from initial estimates of only 0.1% gain. This was the fourth consecutive month of positive readings in the spending figures and suggests that Japanese consumer demand is picking up from the moribund levels of the past year. Both FinMin Omi and EcoMin Ota echoed those sentiments, noting that the next step in the improvement of the Japanese economy would be a rise in wages as labor markets begin to tighten. Should that occur the BOJ would be far more comfortable in implementing a series of additional rate hikes likely putting an end to the easy money of the carry trade. For now traders were content to pare down their yen shorts, but the market was far from convinced that today marked the turning point in the USDJPY. However, with additional key Japanese and US data on the calendar still due to print this week, price volatility in the pair could expand markedly.

In Europe today, the EURUSD saw a nice turn as well, first dropping to 1.3420 on carry trade liquidation in the EURJPY only to recover all the way back to 1.3470 as the surprisingly strong Current Account figures showed a surplus of 5.4B vs. a projected deficit of –4.0B. Although tonight’s news continued to demonstrate the health of region’s export sector, we believe the key to any future ECB rate hikes after the increase in June will be driven by the data from the consumer sector and to that end this week’s German Retail Sales which have been a sore disappointment all year long will be the key to determining the possibility of rate hikes beyond the 4% barrier.

Boris Schlossberg is a Senior Currency Strategist at FXCM.