We are finally beginning to see some momentum based moves in the FX market now that most of the major currencies have broken out of their recent trading ranges. Optimism about deal on the U.S. fiscal cliff and better than expected German data propelled the EUR/USD to 8 month highs. All of the European currencies are performing well this morning but the commodity currencies continue to suffer with NZD/USD leading the sell-off. A wider current account deficit for New Zealand, smaller increase in leading indicators for Australia, concerns about China and expectations for another rate cut by the RBA next year are some of the reasons why the commodity currencies have not been able to participate in the rally. For the time being, it looks like European currencies should continue to rally while commodity currencies underperform.

Mixed U.S. housing market numbers did not stop USD/JPY from rising to its highest level since April 2011. Housing starts fell 3% but building permits rose 3.6% to its highest level since 2008. Overall the housing market continues to benefit from low interest rates but the pace of the U.S. recovery has hampered the momentum. Even though starts declined, the deterioration represented a pullback after a strong October. FX traders should continue to monitor headlines for news on the Fiscal Cliff but tonight’s Bank of Japan monetary policy announcement will determine whether the Japanese Yen has more room to fall. The BoJ is widely expected to increase asset purchases by 5 to 10 trillion yen which may be enough to drive USD/JPY higher but if the central bank shifts to an open-ended asset purchase program like the U.S. and Europe or bend to Abe’s demands and raise their inflation target from 1% to 2%, we expect a very sharp rally in the Yen crosses.