Yen strengthened for the second night in a row as mild carry trade liquidation continued and Japanese Retail trade data printed better than expected. In the aftermath of yesterday’s commentary from Japanese officials that a weak yen will no longer be viewed favorably, the currency market sold USD/JPY below the 123.00 figure as carry traders lost their enthusiasm for further longs. As we noted yesterday it is far too early to tell if USDJPY and various yen crosses have set their near term tops, but the 125.00 figure in the pair has clearly raised valuation concerns and for now serves as serious resistance level in the market.

The one factor that has further undermined the yen over that past several months, has been the very lackluster performance of the Japanese economy which has offered absolutely no support for any sort of aggressive tightening monetary policy from the BOJ. The Japanese central bankers have been forced to stand down as persistent weakness in the consumer sector allowed for only the most modest of rate increases to 50bp from the long standing Zero Interest Rate Policy of the past few years. However, tonight’s economic data may be the first sign that the dynamic in consumer demand is slowly changing for the better. The Retail Trade report showed a better than expected rise of 0.5% vs. 0.4% projected on a monthly basis and on year over year comparison expanded for the first time in 8 months. If this Thursday’s CPI and Household spending data proves similarly supportive, yen bulls may finally have some empirical evidence for their argument that a new rate hike is possible within the next two months. For the time being market sentiment is tilted towards yen longs, but their advantage is slight and vulnerable to renewed carry trade momentum should Japanese economic reports miss their mark yet again.

In Switzerland today, the country’s most important economic report – the KOF index of leading economic indicators - rose for the 7th month row but missed topping the psychologically important 2.00 level. The question surrounding Swiss monetary policy centers not on if but on how much will the SNB hike in September. Swiss economic data has been consistently strong, but the franc has been persistently weak as low Swiss rates have made it the second most popular finding currency on the carry. The only way the Swissie will gain ground on the euro is if the SNB raises rates by 50bp rather than the standard 25bp narrowing its yield disadvantage against the Eurozone. A 2.00 reading on the KOF would have provided the Swiss central bank with ample reason to be more hawkish but alas the number fell short and the franc weakened slightly as traders pared their bets for now.

Boris Schlossberg is a Senior Currency Strategist at FXCM.