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US economic data pointed to a sluggish economy and slow income growth but risk appetite won out the day. The Canadian dollar was the top performer while the yen lagged. The lone item on the upcoming calendar is the Japanese government monthly report.

The market was surprisingly active for such a quiet day, likely due to the top tier economic data on the schedule. The main surprise in the US PCE report was slow US income growth at just 0.2% m/m compared to 0.5% expected but the main focus was on inflation. The PCE deflator rose 0.9% y/y as expected but core inflation was a touch soft at 1.1% compared to the 1.2% consensus.

The market largely ignored the report and the US dollar gradually drifted higher after falling in Asian and European trading. USD/JPY slipped as low as 103.75 prior to the data but finished at the highs of the day at 104.12. EUR/USD rose as high as 1.3717 but slowly drifted back to 1.3700.

The larger story was the S&P 500 as gained 0.5% to a fresh record high. Bourses in Europe were similarly buoyant.

Solid risk appetite helped the Canadian dollar outperform for the third day. It also got a boost from a 0.3% m/m rise in October GDP compared to 0.2% expected. USD/CAD slid below 1.0600 but edged back to 1.0616 later in the day.

As Western markets head to heavy holiday mode, liquidity will fall to the lowest levels of the year. The lone item on the calendar is the monthly economic report from the Japanese government. Last week, Nikkei reported that the line mentioning deflation (ie 'deflation is ending') will be scrubbed from the report. It will be the first time there is no mention of deflation since Sept 2009.

2013 proved the mirror image for the yen in 2008, as it is the only losing currency against gold, down 14%. In 2008, the yen was the only gainer vs gold, at +14%. Here is why the yen continues to be the world's most polarized currency over the last 6 years. Charts & analysis

Long-lived trends have developed in the past two months but they are showing signs of exhaustion. The pound was the top performer last week while the yen lagged. The calendar is quiet to start the week but key data on US inflation is up later.

One thing that stands out about the current market is the duration of yen and Australian dollar weakness. USD/JPY and GBP/JPY have risen for 8 straight weeks while AUD/USD has declined for 9 weeks in a row.

On Friday there were signs of waning appetite to sell the aussie. It gained a half-cent on Friday despite the earlier break below the August cycle lows and it gained despite the strong US GDP report. When a trade doesn't respond to technicals and fundamentals it can be a sign of exhaustion.

On the weekend, Japan's cabinet hiked its fiscal year 2014 forecasts to 1.4% y/y from 1% in August. The CPI forecast, excluding the sales tax increase, is forecast at 1.2%.

Liquidity will drop off dramatically for the remainder of the year. There are no important data releases in Asia or Europe to start the week but North American traders will have some numbers to crunch. At 1330 GMT, the market will have a close eye on the US PCE report, especially inflation readings. The PCE deflator is expected up 0.9% y/y with core prices up 1.2%. At the same time, Canada releases the October GDP report. A confidence vote from the Italian Senate is also a risk.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR +16K vs +9K prior JPY -130K vs -130K prior GBP +18K vs +18K prior AUD -52K vs -46K prior CAD -66K vs -56K prior CHF +12K vs +12K prior

Open interest dropped across the board and as that continues it could provide a boost to the most-heavily shorted currencies.