With no U.S. economic data on the calendar this morning, positive risk flows continued to drive the U.S. dollar lower against all of the major currencies. Between the rise in S&P 500 futures and the downtrend in European bond yields, the EUR/USD has risen to its highest level in 7 weeks. In fact, over the past 12 trading days, we have only seen one down day in EUR/USD as additional aid for Greece and Spain reduces the risk of Europe’s sovereign debt crisis bubbling over again. High beta currencies have also been able to rally because there have no new Fiscal Cliff headlines. We’ve haven’t heard U.S. lawmakers confirm or deny progress and at this point the market is convinced that a partial and benign deal will be announced by year end followed by additional talks in 2013.

The focus over the past 24 hours has been on the comm dollars. This morning, the Bank of Canada left interest rates unchanged at 1% for the 18th consecutive monetary policy meeting, sending the CAD sharply higher. The last time the BoC moved on interest rates was in September 2010 when they raised rates by 25bp to its current levels. Despite slowing growth and soft consumer spending, the Bank of Canada held onto its hawkish bias. The lack of progress on the Fiscal Cliff gave the central bank very little motivation to shift to neutral especially since Governor Carney is distracted by preparing for his departure from the BoC and his new job as the head of the Bank of England. The central bank attributed part of Q3 weakness to energy disruptions and a strong currency and said it is “too soon to know if the housing slowdown will last.” With only a “small degree of slack” in the economy and growth expected to pick up through 2013, the BoC felt “higher rates will likely be needed over time.”

Concerns about the U.S. Fiscal Cliff appeared in both the Bank of Canada and Reserve Bank of Australia monetary policy statements. The Australian dollar has soared despite the Reserve Bank of Australia’s 25bp rate cut. While the RBA was worried about the outlook for global growth, they maintained a neutral tone, providing no hints about their bias to ease again next year.

Federal Reserve President Tarullo will be speaking at 10:45AM ET / 15:45 GMT on “Structuring the Financial Industry to Enhance Economic Growth and Stability.” As one of the more dovish members of the FOMC, his comments should support the case for more easing.

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