Yen Hit Across the Board

The new, recalibrated gauge of Japanese consumer price data registered a gain of only 0.2% on a year over year basis versus 0.5% projected.

Under the new statistical measures of price levels which the Japanese government updates every five years, older items such as sewing machines were taken off the list and newer products such as flat panels were added.

The news revealed that pricing power in Japan remains severely limited as the last vestiges of deflation stubbornly refuse to leave the system. Traders sold the yen hard in reaction to the data speculating that the BOJ will most likely remain neutral for the rest of the year and will therefore present no threat to the newly laid carry trades by hiking rates further.

Despite the disappointing headline data, however, the underlying price trends continued to point upward. If Japans' export driven growth abetted by the weaker yen, continues to maintain pace, inflationary pressures will begin to seep into the Japanese economy sooner rather than later.

Furthermore if oil continues to ratchet higher, the lower yen will only exacerbate Japan's already massive costs for energy imports. Therefore, the BOJ may choose to take pre-emptive action focusing instead on inflationary expectations rather than actual price levels to tighten monetary policy sooner than the market anticipates.

However, until such time that Japanese monetary officials actually begin to articulate these concerns to the market, the yen appears to be destined for further weakness.

In contrast to the yen, the euro remained stationary for most of the overnight trading, depressed slightly on one hand by the muted inflation data from Germany but boosted on the other by the record highs made in the EUR/JPY cross.

German HICP inflation rate printed at 1.9% down from 2.1% the month prior and below ECB self imposed barrier of 2%. The latest price data from Euro-zone's largest economy removes much of the urgency for any ECB monetary actions and maintains the market consensus call for one and possibly two gradual 25bp rate hikes by the end of the year.

Euro's primary strength tonight comes from the EUR/JPY cross which remains the key focus of the FX market today. The EUR/JPY cross once again printed a record high in overnight trade at 149.80 and looks ready to make an assault on the psychologically important 150.00 level. Rumors abound about massive exotic options payout at 150 and given the fact that there is no economic news today, option jockeying may drive today's price action in spot.