The dollar and yen fell after U.S. politicians reached a deal to avoid going over the fiscal cliff. The agreement focused on taxes and spending cuts will be discussed in two months time. EUR rallied sharply to 1.3300 after testing levels into and below 1.3200 in early trade. USD-JPY was carried higher on JPY-cross flows and successfully extinguished 87.00 barriers. Other developments in Asia included a plethora of manufacturing PMI releases, which were mostly encouraging. European markets should find support on the back of U.S. developments. Germany will test markets with the sale of EUR 5 bln of 2-year Schatz notes. The European calendar has the final reading of December manufacturing PMIs, which is expected to improve. The U.K. CIPS manufacturing PMI is expected to fall.

[EUR, USD]
EUR-USD soared from the 1.3200 region in early Asia and traded as high as 1.3300 on U.S. fiscal cliff news as speculative positioning picked up sharply. The move higher was exacerbated by holiday thin trading conditions as Japanese and Chinese markets were both closed. After trading at 1.3300 it settled back into the 1.3275 region, but bias is on the topside, with buyers seen into 1.3235 and 1.3200.

[USD, JPY]
USD-JPY cleared away option barriers at 87.00 on sharp JPY-cross gains, though with Japan out for a market holiday volumes were much lower than usual. EUR-JPY soared from 114.20 lows to 115.85 highs, which lifted USD-JPY to the 87.30 area and reinforced expectations of an eventual move on the 90.00 area. On an intra-day basis resistance is tipped ahead of 87.50 barriers, while buyers are now likely from 87.00, 86.80 and 86.50-60.

[GBP, USD]
Cable took off as markets reacted to U.S. fiscal cliff news. It jumped from just under 1.6250 to trade at 1.6381 highs before a round of profit taking set in. The short term technical backdrop is skewed to higher levels, but after rallying on very low volume there may be a short period of sideways to lower action as European markets digest developments. Buyers will emerge through 1.6300 and likely to be larger in size towards the 1.6250 region, while on top there are outstanding option barriers from 1.6400.

[USD, CHF]
USD-CHF moved into 0.9080 on broad dollar selling pressure. Follow through was limited under 0.9100 by a series of support levels from early May towards the 0.9050-60 region, while there is also evidence of light profit taking by Asian accounts, leaving the dollar pairing close to 0.9100 in early Europe. However, bias remains on the downside and sellers are likely towards 0.9140-50 and offers increase in size from the 0.9180 area.

[USD, CAD]
USD-CAD fell sharply from 0.9945 to 0.9860 in thin Asian trade. The pick up in CAD$ mirrored movement across the other commodity bloc currencies, which were boosted by U.S. fiscal cliff news. The U.S. deal should keep the U.S. economy on track and avoid a recession. USD-CAD is likely to experience a short period of sideways action as market participants digest near-term developments. The move lower has negated the recent uptrend, though it did come on very low volume and choppy two-way flows could go through before there is a sustained move.