The dollar and yen maintained easier levels as Asian equity markets benefited from rallies in Europe and the U.S. Some specs added to positions at the open, but there was no follow through ahead of today's FOMC decision, which is expected to result in QE to replace Operation Twist. Markets shrugged off the North Korean rocket launch, although it brought condemnation from Japan and the U.S. There is still encouragement on U.S. fiscal cliff negotiations after the WSJ said both sides discussed new offers on spending and taxes on Tuesday. Italy will test markets with a bill auction today and a bond auction tomorrow. Greece's debt buyback also was a success and eurozone finance ministers said after a teleconference yesterday that there are no insurmountable obstacles to the payout of the next bailout tranches.

[EUR, USD]
EUR-USD maintained a firm tone around 1.3000. However, it lacked the momentum to trigger stops up to 1.3025 due to an overhang of sell orders. Ahead of the Fed announcement movement may be limited. However, if news flow remains supportive then buying interest could pick up. Fund names have still got interest to sell into 1.3040 and 1.3050, but Asian sovereigns have been active hedgers over the last couple of sessions on EUR dips, while hourly and daily studies also point higher now.

[USD, JPY]
USD-JPY edged up towards 82.70 after it started the session ahead of the 82.50. Appetite to buy the JPY crosses was prevalent from retail accounts and offshore names looking for yield, as well as gambling on further yen weakness amid expectations of a LDP election victory. EUR-JPY extended yesterday's rally to 107.50, AUD-JPY moved just over 87.00 and NZD-JPY traded over 133.00 amid general strength in the commodity bloc currencies. USD-JPY upside movement is slow due to the influence of outstanding option triggers from 82.90 to 83.50, which are rolling off from this Friday and over the next week or so. Hedging further yen weakness has been persistent in the options markets and there is a risk of a squeeze in USD-JPY as the week progresses, but note this is a crowded trade.

[GBP, USD]
Cable is trading above 1.6100, but follow through is lacking in slow trade. With stocks on the rise and sentiment in Europe looking better the topside is likely to influence. Cable is not really going anywhere at current levels, but the short term picture could change if it cleared offers around 1.6135 and short term moving averages in the mid-1.61s. Range players are still comfortable fading rallies in anticipation of more weak U.K. data later this week. Jobless claims are due today, but employment numbers have been reasonably good considering economic fundamentals. CBI industrials trends on Thursday is likely to be more of a challenge and may reaffirm triple-dip recession risk.

[USD, CHF]
CHF maintained softer levels after it fell after Tuesday's European open amid SNB policy speculation. EUR-CHF took off from 1.2080 over 1.2125 after UBS confirmed it would introduce deposit fees on CHF balance from December-21, which was widely tipped last week. However, it triggered talk that SNB could introduce negative rates on Friday or raise the floor of the lower limit in EUR-CHF above 1.2000. However, we expect the SNB to maintain policy status quo on Thursday. There are no signs that capital inflows have accelerated and the situation in eurozone is better than it was earlier in the year. Recent moves by UBS and CS on CHF deposits should also deter capital inflows to a degree without the SNB having to act for now.

[USD, CAD]
USD-CAD remained heavier after it moved to 0.9958 lows on Tuesday after Canadian trade deficit narrowed. Light stops were reportedly tripped at 0.9860, though follow through was very limited. Option and corporate bids were seen from 0.9850, which put a floor under the downside. Offers are now layered from 0.9980 to 1.0000.