Trading remained ranged bound for most the night in the currency market until news hit the tape that North Korea fired two short range missiles off its coast prompting a flight to safety response into the dollar as both the euro and the yen tumbled by 30 points in a matter of minutes. Its doubtful that the North Korean moves provide any meaningful long term geo-political risk given China’s strong interest in restraining its unpredictable ally ahead of the 2008 Beijing Olympics. Still Pyongyang regime is one of the most inscrutable and volatile governments in the world and its threat can never be dismissed out of hand. Its actions were most likely precipitated by Japanese Prime Minister Abe complaints ahead of the G-8 meeting that North Korea is not complying with an international agreement to close its uranium enrichment facilities. In the short run, the latest saber rattling is likely to keep the dollar bid as the market looks for the situation to diffuse.

On the economic front, the news was decidedly upbeat in the Asia Pacific region as Australian employment once again blew past expectations printing at 39.4K versus 10.0K forecast. This is the second consecutive string employment report from the land down under and puts even more pressure in the Australian monetary authorities to raise rates in the near future, especially in light of the fact that its next door neighbor New Zealand surprised the market with a hike of its own taking short term rates to 8.00% - the highest in the industrialized world.

With global rates inching higher, the carry trade continues to be the dominant theme in the currency markets as AUD/JPY now trades above 102.00 and NZDJPY approaches 92.00. For the time being there is nothing on the horizon that threatens this trade and these positions could continue to appreciate on sheer momentum alone. But the underlying premise to be long the carry at this point rests on the assumption that US consumer spending and economic growth will revive in Q2. Should it fail to do so, it may well drag down global growth with it and investor sentiment will quickly turn to anticipating loosening rather than tightening monetary conditions.

Finally as expected the Bank of England kept its rates unchanged at 5.50% and in keeping with tradition did not release any commentary regarding its decision traders will want to view the minutes of the meeting which will be released in approximately two weeks in order to assess the composition of the vote. However, given the recent slowdown in the UK retail spending the Bank's decision not surprising. Higher rates and higher energy costs have seriously dampened UK consumer demand and the BOE is likely to remain neutral for the time being unless inflation gauges once again heat up.

Boris Schlossberg is a Senior Currency Strategist at FXCM.