Yen Probes 122.00 After G-7

• AUD RBA ratchets down inflation expectations
• JPY No comment from G-7 hovers at 122.00
• GBP PPI input runs cold
• USD only Treasury Budget on docket

The G-7 meeting over the week-end made no official mention of yen weakness essentially repeating the same language from last time and focusing again on China’s need to rebalance. However, individual policy makers including ECB president Jean Claude Trichet and Japanese Finance Minister Koji Omi both addressed the issue of carry trades with Mr. Trichet stating “"We want the markets to be aware of the risks in one-way bets, particularly on the foreign exchange markets,” while Mr. Omi echoed those sentiments by noting, “I think that the markets, including currency markets, it’s not desirable for it to move in one direction.”

It appears that the G-7 fiscal and monetary authorities have decided to deal with the ballooning carry trade issue through jawboning the market rather than official policy action. Whether the markets will seriously respond to any of this commentary remains to be seen. The currency markets are notorious for pushing positions to their limits and unless global central banks provide some concerted action instead of just rhetoric speculators will continue to test the highs in USDJPY.

In overnight trade the USDJPY rallied to 122.00 backed off only to probe that level again. Still, the pair is vulnerable to a sell off, and although the majority of traders are looking for some positive Japanese data to catalyze the correction, the retrace could actually come from the US side, if this week’s US economic reports disappoint.

The most important of those reports will the Retail Sales number on Wednesday. The market does expect some pull back in the number, but if the data actually shows contraction, the goldilocks scenario may go right out the window, as speculation will mount that US consumer slowdown is more severe than initially thought and that last month’s robust numbers were more a function of unseasonably warm weather rather than underlying consumer strength.

In the meantime, trade in the USDJPY is contained to the 121.00-122.00 level. Nevertheless, if US data proves better than expected this week specs will have no compunction in pushing the pair through it’s yearly highs and G-7 authorities may have to rethink their approach if they want to contain the price action.

Although USDJPY saw some gains, not all carry trades were working tonight. Most notably AUDJPY dropped hard after the RBA in its February statement on Monetary policy noted that “the most likely prospect was that the underlying inflation in the medium term would be a little below its recent rate.” For a market geared up for additional RBA rate hikes, the news tonight was a major disappointment as it removed much of the impetus of for the central bank to tighten anytime in the near future and as result the Aussie weakened materially.