The dollar and yen added to losses in early trade in N.Y. on Wednesday, as risk appetite held up on optimism over U.S. fiscal cliff negotiations. Ongoing expectations of further Japanese policy stimulus helped as well, though as stocks faded, and EUR-USD was unable to maintain the 1.33 handle, profit taking set in, reversing the greenback to higher levels. On the economic calendar, housing starts were a bit light of expectations, though had little market impact. Dealers will look to the BoJ policy announcement overnight, where the Bank id expected to raise the asset purchase target by up to Y10 tln. In the meantime, the FX market will remain lightly traded, with a lack of liquidity liable to keep conditions choppy.

[EUR, USD]
EUR-USD moved firmly over 1.3300 as the N.Y. market keyed off the broad based pick up in risk appetite. There was heavy buying of euros from Asian central banks on the way up in the European morning, along with the usual speculative influences. Above 1.3300 there is an outstanding One Touch 1.3340 trigger that is due to run until December-31. This was left untouched however, as gains were limited to 1.3308. The pairing pulled back from the 1.3300 level, eventually trading into 1.3235 as stocks turned negative, and as option backed sellers remained in place into the highs. Dip buying remains in vogue, and bids are said to be lining up ahead of 1.3225 now.

[USD, JPY]
USD-JPY experienced good selling after the N.Y. options cut, where 84.50 strikes rolled off. The pullback from N.Y. highs over 84.60 to near 84.20 came on modest sales as liquidity is a challenge into the Xmas holidays. The earlier breach of 84.50 barriers/stops was reportedly in up to $2.5 bln. However, option sources suggest Friday's 85.00 expiry triggers should be well defended. Interest went through for Friday at 85.00 in size today amid heavy gamma hedging. The catalyst for further yen weakness could come from tomorrow's BoJ policy outcome, though it does have a track record of disappointing expectations. It is widely expected to raise the asset purchase target by up to Y10 tln, but Shirakawa may dig his heels in if he believes LDP's Abe is compromising its independence. However, Shirakawa is likely to look more sidelined in the coming months as his term ends next April, along with two other board members late March.

[GBP, USD]
Cable moved into 1.6300 on better risk appetite. Buyers on the way up included a large U.S. name and a Middle Eastern accounts, which overcame an active Asian central bank on top. There was supply into 1.6300 related to outstanding option barriers, while the subsequent reversal in equities prompted profit taking. Cable eased back into 1.6250 into the N.Y. close. During the London morning, the BoE minutes revealed an 8-1 vote to keep the asset purchase target unchanged at GBP 375 bln. The BoE said that the sterling rise over the last 12 months was unwelcome, but had no impact on price action. The minutes said that U.K. economy will probably shrink in Q4.

[USD, CHF]
USD-CHF extended to 0.9100 as the better risk backdrop continued to weigh on the dollar tone. In Europe, interest has slowed, but on the chart risk there is risk of a test of early May lows around 0.9050 and then the 0.9000 area from late April. Natural demand should continue to feature around 0.9100 and there is likely to be an options influence on dips. Indeed, the pairing put in a floor near 0.9090 before bouncing over 0.9120. Sellers are expected to use the 0.9170-0.9200 area for short term positions, while more resistance is tipped around 0.9220-30.

[USD, CAD]
USD-CAD was supported into the 0.9850 level in early trade, and made its way to highs over 0.9880 by mid-morning. It has since eased back to lows under 0-.9865, though trade was very light. The pairing looks set to maintain familiar ranges for now, as selling interest remains into 0.9900, while buyers are layered down from 0.9850 to 0.9800. Repositioning by macro funds via the commodity bloc currencies ahead of year-end has been evident, and near term, we look for further upside potential for USD-CAD.