The old FX maxim that return follows yield was never more accurate than today as currency trading kicked off this week. The low yielders were once again the victims of carry trade sales as both the yen and the Swiss franc reached record lows against the euro and the yen also hit a 15 year low against the pound.

Yen’s weakness was due to the lingering after effects of Governor Fukui’s non- committal stance on rate increases on Friday which suggested that the BOJ may hold rates at 50bp all the way through August. On the other hand, the Swissie was down despite another hawkish speech from SNB Chairman Roth who maintained that weakness in the franc would not last and is in fact in conflict with the current robust state of the Swiss economy.

Yet Governor Roth did not back up his rhetoric with action as the SNB refused to raise rates last week by 50bp opting instead to go for the more conservative 25bp hike. The net result is that in the present monkey-see-monkey-do investment environment where appetite for yield governs all trading decisions, the franc is weak as it continues to be highly correlated with the yen despite clear differences in the two countries economic performances. Thus with little danger of interest rate compression, and a relatively benign environment in global equity markets the carry trade continues to dominate, with most of the speculative capital flowing to the euro and the pound on the assumption that rate increases are most imminent in those two currencies.

With global economic calendar relatively sparse this week, yield is likely to continue to be the primary driver of trade in the FX market this week. However, the conventional wisdom that both the ECB and the BOE will raise rates within the next several months may start to be challenged. In UK, today’s announcement by the Tesco grocery chain that it will make price cuts of approximately 270 millions pounds suggests that pricing pressures are actually headed down not up. Even today’s Rightmove housing survey, while continuing to register double digit year over year gains reveals that asking prices in half of London's boroughs actually fell last month. Furthermore, the Council of Mortgage Lenders has estimated that in the second half of this year more than a million fixed rate mortgages will be repriced from 4.5% to 6.0% - a massive increase in debt service that is almost certain to slowdown both the increase in housing prices and BOE’s tightening policy.

In Europe, a similar dynamic may prevail but for different reasons. The rise in the currency is finally impacting the export sector as both Factory Orders and Industrial Production have slowed markedly. With EZ Retail Sales still lackluster at best, the ECB is likely to be more cautious regarding another rate hike in the near future. Therefore, while most market speculators are positioned for further rate hikes from ECB and BoE they may be waiting for policy moves that are not coming any time soon.

Boris Schlossberg is a Senior Currency Strategist at FXCM.