The EURUSD was pressured throughout the night as further carry trade unwinds in EURJPY triggered stops first at 1.3675 and then at the 1.3650 level in the pair. EZ economic news was generally supportive with GFK consumer confidence rising to an eight month high and CPI data out of Germany generally firmer, but the market ignored the data with the dollar rallying on a bit of flight to safety dynamic and speculation of a strong rebound in GDP. We are skeptical the GDP will hit the lofty 3.4% expectations given the softness in Durable goods, persistent weakness in housing and in our opinion market’s overestimation of the positive contribution of exports. While US manufacturers have clearly benefited from lower dollar, much of the positive impact in the trade Balance is likely to have been offset by the cost of higher imported oil.

Nevertheless, the EURUSD may be pressured for the rest of the day as the greenback rally appears to be driven by technical factors as many speculative trades from equities to commodities to the carry trade are unwound and those assets are parked in dollars for the time being.

Yen has been the key beneficiary of the this move to risk aversion gaining more than 200 points since yesterday. However, the unit lost some momentum in late Asia trade as USDJPY once again traded above 119.00 figure. Despite the power of the carry trade unwind, the yen is unable to gather even a modicum of support from the fundamentals. Overnight Japanese data was horrid with Retail Trade slipping to -0.4% and CPI continuing to contract. Japanese retail traders have been one of the staunchest sellers of their own currency and they stepped in to buy the dips in USDJPY tonight helping to stabilize the fall.

The other funding currency in the carry trade, the Swiss franc saw very positive data after the release of the KOF index of leading economic indicators printed at 2.13 – it best reading since August of 2006. The market however did not react to the news as most traders remain dubious that the strong economic data out of Switzerland will push the SNB to hike rates by 50bp in September given the muted inflation pressures in the Swiss economy.

Boris Schlossberg is a Senior Currency Strategist at FXCM.