Euro Holds Still, Yen Nearly Touches 113.00

Very quiet start of the week in the FX, as all European financial markets are closed for May Day holiday. All of the trading action occurred in Asia, where momentum fueled selling pushed the USD/JPY to within two points of the 113.00 figure. The move occurred despite lackluster Japanese economic data which showed Labor Cash earnings actually declined -0.2% on month over month basis and Vehicle Sales dropped -7.8% suggesting that improving consumer confidence is yet to translate into any meaningful pick up in spending.

With Golden Week holiday effectively closing down Japan from Wednesday onward, hedging operations by exporters which were pushed forward, may have accelerated the move in USD/JPY. In the grander scheme of things however, the pair may pause at this level, as the primary impetus for yen longs - the raising of short term interest rates by the Bank of Japan may be delayed longer than the markets expects.

As we noted last week, Household Spending remains key to future Japanese monetary policy and last week's results are troubling to the yen bull case. Household Spending declined -2.1% on year over year basis offering a clear signal that deflationary pressures remain stubbornly embedded within the Japanese economy. The BOJ is unlikely to move on ZIRP, until those numbers begin to shows positive year on year comparisons.

The euro for its part consolidated its gains, as traders awaited today's US economic data which includes Personal Income and Personal Spending reports as well the ISM Manufacturing release. Also on deck is the PCE Deflator- former Chairman Greenspan favorite measure of inflation.

Should this report as well as the prices paid component of ISM print stronger than forecast, dollar bulls may get a boost as inflation expectations will likely ratchet higher. As our technical analyst pointed out today, since its inception the euro has only risen twice by 200+ points on two consecutive weeks. Each time, the unit retraced some of its gains the week following.

If US data can post any positive surprises this week, that may provide enough justification for a correction back to 1.2500 level.