Risk aversion steepened in early Europe, but there was no lasting rally for USD, JPY or CHF due to short term repositioning and currency rhetoric from ECB's Praet and Nowotny after a warning on EUR-USD appreciation by Eurogroup head Juncker. EUR-USD bottomed out at 1.3260 and traded back over 1.3300 after Nowotny didn't see a problem with FX levels and gained traction on very strong bargain hunting via the yen-crosses. JPY posted strong gains overnight after LDP Secretary General Ishiba echoed yesterday's warning on excessive yen weakness by Economy Secretary Amari. Cable threatened 1.6000 on poor fundamentals, but was supported by a AAA name defending a 1.5990 barrier. EUR-CHF corrected the recent rally to trade into 1.2335, but also recovered to 1.2375 on the general euro rally.

[EUR, USD]
EUR-USD reclaimed 1.3300 after ECB's Nowotny said the EUR exchange rate is not a matter of concern. EUR lost 1.3300 in late N.Y. on Tuesday after Eurogroup head Juncker said euro is dangerously high. ECB's Praet said the ECB has no exchange rate target in the press and Draghi never comments on exchange rate developments. Nowotny's remarks are the most explicit to date on the EUR and should reduce speculative selling. That said, short term momentum studies and the daily chart have rolled over after EUR failed to move back over 1.3400 and should encourage selling pressure on upticks.

[USD, JPY]
USD-JPY filled stops on model fund selling to register intra-day lows at 87.80, but then rebounded on bargain hunting. However, upside movement is limited after it moved move through the key Tenkan line at 88.25 in Asia on heavy fund selling after another warning on excessive yen weakness. This fueled speculation that the government may be comfortable with a 85-90 range and is managing expectations, leaving the market more broadly balanced ahead of next week's BoJ meeting. Japanese importer hedging is prevalent from 87.70 into 87.50 ahead of more sell stops, while short term sellers are likely into 88.25 and over 88.50.

[GBP, USD]
Cable threatened 1.6000 amid European account selling as the U.K. AAA rating came into focus after Fitch said it is hanging by a thread. The remarks aren't considered to be a new development, but added traction to sterling macro sellers. Cable's inability to reclaim 1.6100 encouraged downside risk, though reports of a large bid from a AAA name kept sell stops intact. Upward momentum should remain limited as EUR-GBP also met real money demand on the pullback below 0.8270 from yesterday's peak around 0.8325.

[USD, CHF]
EUR-CHF met its first meaningful bout of selling after it briefly breached 1.2400 during Tuesday's N.Y. session. It traded at 1.2414 highs, where large European names emerged, along with a prime U.S. name on behalf of a macro fund. It continued to meet offers around 1.2400 in Asia and extended from 1.2380 to 1.2335 since the European session got underway, which came in tandem with the 2.9% y/y rise in Swiss November retail sales. Buyers are noted into 1.2330 and 1.2300 as longs still target an eventual test of 1.2500 options triggers. However, offers are expected to be sizeable on a 1.24 handle due to very good resistance at 1.2475, along the psychological 1.2500 level.

[USD, CAD]
USD-CAD remained stuck in place overnight, with 0.9830-65 levels largely defining the trading range. The scope for a break of range seems low given the build up of support that is noted from 0.9815 to 0.9800, which has encouraged short covering activity ahead. Offers remain in place from 0.9880 and reinforce activity from short term accounts playing the range.