The dollar and yen fell after risk appetite got a boost from the expansion in China manufacturing after official PMI data reached its best levels in seven months. EUR surged from 1.2980 towards 1.3050 despite Moody's downgrading ESM and EFSF to AA1 from AAA with a negative outlook after Friday's N.Y. close. USD-JPY and the crosses held firm, though IMM data revealed that yen short positioning reached five year highs last week and a risk against further weakness. AUD was held back by RBA rate cut expectations after domestic numbers were weak. There was Fed speak from Evans, Kocherlakota and Stein, which backed QE and the current policy stance. However, Philly Fed's Plosser was not convinced that QE was effective. Meanwhile, Germany's Merkel told the German Bild am Sonntag that a haircut on Greek debt could be considered in two years.

[EUR, USD]
EUR-USD posted a decent rally out of 1.2980 up to 1.3047 highs on large macro fund demand and central bank reserve diversification. The pick up in EUR demand reflected the more stable sentiment after eurozone debt markets improved last week despite the difficulties still evident in Greece and the lack of aid request from Spain. ECB's Noyer said the main concern was to ensure lower lending across the eurozone and negative deposit rates were not excluded from this. Noyer added that central bank policy had been effective arguing that inflation expectations were well anchored. EUR longs eye a run up through option barrier exposure between 1.3050 and 1.3075. Dip buying is likely into 1.3000 and 1.2970-80 after the bullish break higher.

[USD, JPY]
USD-JPY and the JPY crosses were supported on dips amid more speculative yen selling. However, USD-JPY continued to meet sellers on upticks related to outstanding option positions from 83.00, exporter hedging and M&A developments after Sharp agreed to selling its offshore TV plants to Hon Hai for Y55 bln. Yen selling should continue on upticks amid expectations of further BoJ policy stimulus ahead, though progress could be slow. Today's comments from BoJ's Shirakawa and Nishimura both indicated that it remains open to more stimulus, though Shirakawa stressed the importance of maintaining independence in spite of market speculation. The latest IMM positioning is a potential risk for yen shorts after it hit five year highs in CFTC data released on Friday.

[GBP, USD]
Cable still struggles to break higher due to good offers from 1.6060 and heavy interest ahead of 1.6100 barriers. On the daily chart Cable is supportive and dip buying should continue in the near-term, though the congestion of topside interest could keep ranges tight today. EUR-GBP firmness also offers potential headwind after it broke up to 0.8130 on Friday, where it retested in Asia.

[USD, CHF]
CHF remains supportive, largely due to the recent drop in USD-CHF. The dollar pairing moved through key support at 0.9250 late last week as risk appetite improved and maintained a heavy tone in Asia. Good two way action is noted around this region a this represents a long term trend line, ahead of good support levels layered into 0.9200 that supported in mid-October. EUR-CHF is trading close to 1.2060 after local names reset bids at 1.2030-35, which general improvement in eurozone sentiment also encouraged some swissy outflows.

[USD, CAD]
USD-CAD is still range bound after it was unable to sustain higher levels on Friday. It jerked higher after the softer Canadian GDP data, but peaked over 0.9950. The pairing continued to trade a narrow range, inside last week's 0.9905 to 0.9960 band all week, as opposing forces keep the CAD hemmed in. Option and fund offers have been at the top of the range, while corporate buyers have kept the 0.98 handle from view. We expect the target overnight rate to remain at 1.00% when the BoC meets on Tuesday, and for the maintenance of the October language regarding eventual withdrawal of stimulus. Despite the one-two punch of a tepid 0.6% Q3 GDP gain and flat September GDP figure, the underlying growth dynamics are not far removed from what the BoC anticipated in October.