The European morning saw choppy trade as thin pre-Xmas trade weighed on liquidity. A positive China flash manufacturing PMI reading fueled a 4.3% surge in SSEC, though movement across the rest of Asia and Europe was far more restrained. Nevertheless, the USD and JPY consolidated losses, leaving EUR, GBP and AUD close to recent trend highs. However, the lack of progress made on the U.S. fiscal cliff is a source of tension for the market, while some have questioned the wisdom of Fed QEternity. Eurozone PMIs improved further, though still broadly in contractionary territory. Meanwhile, EU leaders agreed to pursue a eurozone wide scheme to wind up failing banks as well as binding contracts for individual countries with the EU to boost growth and reforms.

[EUR, USD]
EUR-USD pulled back below 1.3080 after profit taking went through. EUR-JPY, which was a factor on the way up, also influenced on the way down after it turned back to 109.50 after 110.00 barriers held in early Europe. EUR-USD longs were mindful of standing 1.3130 offers from real money, which encouraged short term supply from 1.3110-20. Buyers of euros have included Swiss and German names, but selling is noted from U.K. and U.S. accounts. Sources tip eurozone bond redemptions early next week as a potential source of supply. PMI data was mixed, but still in contractionary territory for the most part. Germany was the exception. Manufacturing fell short of expectations, but services PMI jumped.

[USD, JPY]
USD-JPY maintained a firm tone after risk appetite was boosted by good China PMI data overnight and ahead of the weekend Japanese election. It threatened 84.00 barriers in late Asia, but large Japanese selling encouraged an early European move to 83.65. Some specs were in profit taking mode, but for the most part many recent yen shorts are hanging on for further losses in anticipation of a LDP election victory, which is expected to trigger more aggressively policy stimulus ahead. In the options market fund names are hedging against potential yen strength after the election outcome. Big risk reversal selling went through via a U.S. name in the 1-wk, there has been selling of 1-wk 84.00 strikes and buyers of 82.50 to 83.00 yen calls

[GBP, USD]
GBP found support on dips amid speculation of central bank selling pressure via EUR-GBP. Cable ran into buyers at pullback lows just in front of 1.6110 and headed back to 1.6100 after the cross ran into good selling from 0.8125. Order flow was challenged by liquidity today, with traders reporting thin year-end type trading. Cable upside is limited over 1.6140, with offers placed into 1.6150 option expiries, while barriers are noted at 1.6175 and 1.6200. The impact from S&P's U.K. rating outlook was shortlived as it is in line with Moody's and Fitch, but the U.K/German 10-year spread moved out to the widest levels in over a year at 53 bps, suggesting some are pricing in the prospect of rating action in early 2013.

[USD, CHF]
USD-CHF is still under pressure as broader dollar moves keep risk skewed to the 0.9200 area, where a mixture of two-way order flow is widely tipped. However, there are signs that specs are pausing before adding to positions built up in the last couple of sessions. Thin year-end markets will begin to influence price action, while appetite for further risk may be restrained as fiscal cliff negotiations drag on. Meanwhile, EUR-CHF marks time under 1.2100 after some swissy shorts reduced positions following yesterday's steady hand from the SNB. Buyers are noted into 1.2075 and 1.2060, which marks recent pullback lows, while offers have been lowered to the 1.2125 area ahead of near-term resistance from 1.2130.

[USD, CAD]
USD-CAD stayed above its post FOMC lows of 0.9827 overnight, though continued to run into selling interest on modest upticks. Corporate buyers were seen lined up from 0.9800, and stops at 0.9820 could see the figure targeted should they be triggered. Risk levels have improved in Asia, but the back and forth from U.S. congressional leaders on the "cliff" is still expected to restrain activity. Sellers are noted from 0.9855-60.