In a very quiet lackluster session – typical of pre-NFP night – the yen firmed in Asian and early European trade as Japanese investors repatriated funds home ahead of the October fiscal year end. Friday night flows were dominated mainly by technical factors as economic calendar remained light.

One other theme that may be starting to form in the currency market is that we may be witnessing the first signs of the end of the global tightening cycle in rates. The uniform message from G10 central bankers this week was that liquidity was paramount as capital markets continued to grapple with the problems of credit. Even those central banks whose economies have performed extraordinarily well, such as Australia and UK, have been circumspect in their rhetoric preferring to err of the side of caution for the time being.

It’s too early to tell whether this is simply a pause or a definitive stop in the global monetary tightening cycle. Certainly one gets the sense that most of the G10 monetary authorities would like to hike rates further especially given the double digit growth in M3 monetary aggregates in both EZ and UK. However, the policy makers remain on the defensive due to the unrest in the markets. Indeed we think they will have to no choice but to be reactive rather than proactive, as investors deal with the growing losses in the sub-prime debt market and the concomitant problems of confidence in the money markets as key participants continue to be risk averse.

This change of tone from G10 central bankers of course may have some long term implications on the carry trade. If in the next several months the deceleration in economic activity becomes more pronounced, investors' behavior will tilt towards risk aversion, rather than risk taking. In that case the carry trade will lose a lot of its luster despite the very healthy rate differentials between most of the high yielders and the yen, as investor will focus on safety rather than return. Today’s NFP’s could be the moment of truth in validating or refuting the slowdown scenario. Let’s see what happens.

Boris Schlossberg is a Senior Currency Strategist at FXCM.