The start of the week brought with it the predictable follow-through in the carry trade unwind as Nikkei sank another 357 points in the wake of Friday’s horrid NFP number in the US. The selling flows in AUD/JPY and NZD/JPY were particularly strong at the start of Tokyo trade, pushing USD/JPY to a session low of 112.60. However, the release of the Japanese GDP figures turned the tide as the weaker -than-expected data, along with some bargain hunting, helped to form a bottom for the night and the pair bounced nearly 100 points off the lows.

Japanese GDP printed at a woeful –1.2% for Q2 as opposed to projections of –0.7% decline as private consumption collapsed to –0.3% from 0.1% initially forecast. The news erased any chance of a rate hike from the BOJ at the upcoming monetary policy meeting on September 18 and in fact put into doubt the possibility of further rate hikes for the rest of the year. The interest rates on the yen therefore will likely remain extremely low at 0.5%, making the writing of obituaries for the carry trade, such as the one that was done by UK Times over the week-end, a bit premature. Nevertheless, should US equities slide further today testing the 13,000 handle on the Dow USD/JPY will most assuredly decline once again. Presently, yen appreciation only comes as a result of carry trade liquidation while the fundamental picture in Japans provides absolutely no support to yen bulls.

In Europe French Industrial Production rebounded sharply on the back of strong demand for new car production. The figures jumped 1.3% from 0.4% originally expected, but the data must be viewed in the context of the sharp declines in German Factory production over the same period of time. Overall we continue to believe that EZ growth has peaked and will have even a more difficult time sustaining momentum going forward given the potential problems brewing in the US market. In short this suggests that ECB will remain stationary for the rest of the year and euro’s progress higher will be determined much more by its familiar role as the anti-dollar rather than by any speculation of further rate hikes out of the Eurozone.

Finally, UK input PPI data printed a bit softer than excepted at -0.5% versus –0.3% forecast indicating some easing of pricing pressures. Overall, the core PPI Output reading remained slightly elevated at 2.4% versus 2.3% the month prior, but by itself it hardly provides enough evidence for BoE to consider tightening further. The pound eased a bit in the news on speculation that today’s report allows the UK monetary policy makers to maintain a neutral posture for the time being. As we noted last week, the G10 central banks appear to have instituted a moratorium on rate hikes until the credit market turmoil subsides, and that position is unlikely to change anytime soon.

Boris Schlossberg is a Senior Currency Strategist at FXCM.