Japanese Current Account surplus far surpassed expectations printing at 2279 billion yen versus 1948 billion expected. The trade surplus jumped 34.7% to Y1.03 Trillion yen - the third month in a row above the 1 Trillion mark. Weaker yen help fuel the growth in exports while keeping import demand contained. Overall, both imports and exports receded from their recent highs and the growth in the current account was driven by massive income surpluses generated by Japanese investors.

Those income gains are due in no small part to the insatiable demand for yield by Japanese retail investors. Thus, despite very constructive economic results, the yen was weak once again trading well above the 122.00 level as US yields reached their highest level in 5 years. There was talk in the markets that Japanese insurers may allocate more capital to US bonds if yields on the 10 year which are currently quoted at 5.25% rise to 5.50%. That would of course be bullish for USDJPY as the Japanese insurers would need to buy more dollars to invest into US bonds and may put more pressure in Japanese monetary authorities to raise rates sooner as yen continues to decline against the high yielders.

In Europe, both the euro and the pound came under the pressure of more stop orders with EURUSD breaking below 1.3300 while pound lost the 1.9700 figure. Cable was hurt by news that UK wages grew more slowly than markets had forecast. Average earning in UK expanded at 4.0% rate versus 4.4% expected pouring cold water on the idea that wage inflation is accelerating. This data coming as it did after hawkish comments from BoE Governor King yesterday, now raises doubts about the possibility of another rate hike as soon as July. The BoE is clearly a very aggressive institution which likes to act preemptively, but UK monetary authorities will have a hard time justifying further tightening given the lack of pricing power by industry and moderate wage gains by labor. If tomorrow UK Retail Sales also disappoint they may provide the final argument against another rate hike next month.

Yield continues to be the dominant story as US bonds yields target the 5.50% level putting a supportive bid underneath the dollar. For the time being dollar bulls control the market, but today’s US Retail Sales data will be key to maintaining that rally. Analysts forecast a 0.7% gain from last month -0.2% decline. As long as the data matches expectations or simply shows positive month over month growth the dollar uptrend should stay in tact. However should the data surprise to the downside, bond yields may compress once again. A second month in a row of contractionary data in US Retail Sales would send very bearish signals regarding the US economy, suggesting that the consumer may be totally tapped out. In the worst of both worlds, US may be faced with slowing consumer demand and higher inflation, creating a very negative environment for the currency. In short the Retail Sales number may provide the clue to the direction of the EURUSD for the rest of the week.

Boris Schlossberg is a Senior Currency Strategist at FXCM.