Yen, Euro, Pound All Retreat

With little help from monetary authorities, yen bulls will now have to look to the rise in the yield of 10 year JGB's above the psychologically important 2% level as a possible trigger for yen strength. At 2% or above many of the Japanese institutional investors including life insurance companies are likely to repatriate investment funds from abroad which would strengthen the currency.

With public debt at 170% of GDP, Japanese officials are naturally displeased about the spike in long term yields which would considerably increase the debt service of their long term obligations.

Mr. Muto today reaffirmed his concern about volatility in bonds. However, if Japanese consumer data, especially the Household spending figures and Retail trade numbers due next week, continues to demonstrate expansion, the 2% yield in JGBs may be a foregone conclusion. In the meantime, convenience stores sales slipped -2.5% on a year over year basis pouring cold water on the optimistic projections of yen bulls for the time being.

Across the pond, the pound cratered reversing some of its gains from the past few days as UK inflation data showed significantly more weakness than the market anticipated registering a reading of only 1.3% on the core level against 1.5% expected.

We have been skeptical about the UK growth scenario, given the deteriorating unemployment situation in the country, and today's data suggests that consumer demand going forward may be more restrained that the market projects.