US Dollar
The last few trading days were suppose to be quiet with most US and Japanese dealers out for the holiday.  However it has proven to be anything but that.  In fact, we have not seen this degree of volatility in at least a month.  The US dollar has completely melted down with the Euro and British pound hitting a yearly high against and the Japanese Yen hitting a 2 month high.  The triggering of stop loss orders on Friday has intensified carry trade liquidation in a low liquidity environment. The EUR/USDââ,¬â"¢s move from 1.2975 to 1.3075 in 10 minutes at the European open is a clear confirmation that flow rather than fundamentals is to blame.  There was no US data released today and the financial markets that were open all closed early because of the holiday.  Comments from Chinese officials about the need for more flexibility in the Yuan and the countryââ,¬â"¢s currency policy are certainly not helping.  Interestingly enough, this was exactly what happened in 2004 as well.  The US dollar began to breakdown after two weeks of consolidation on the eve before Thanksgiving.  Then on Thanksgiving Day, the EUR/USD rallied 100 points.  The move extended even further on the Friday after Thanksgiving and on the Monday when everyone returned from their holidays, the move actually failed to extend much further.  Instead, the pair consolidated for a few days as EUR/USD longs took more profits off the table while traders that were short banked their massive losses and quietly licked their wounds.  Unlike the past week, we do have a very busy trading week ahead of us.  There are a number of central bank officials speaking from around the world including Fed Chairman Ben Bernanke who will be talking about the US economic outlook.  Data wise, we are expecting data from the manufacturing and housing market sector along with consumer confidence and third quarter GDP.

Euro and Swiss Franc
In the last two trading days, the EUR/USD has surged over 200 points.  The currency pair is now trading above what we suspect is the European Central Bankââ,¬â"¢s comfort zone.  With only 7 trading days to go before the ECB meeting, if the EUR/USD does not fall back below 1.30, the central bank has no choice but to signal to the market that the December rate hike will be their last and that 3.50 percent interest rates is the peak.  Not only does the strong Euro pose a risk to growth, but it also relieves inflationary pressures, which will give the ECB a good reason to shift gears.  German exporters actually attempted to downplay the move by saying that they have no problem with the Euro above 1.30, but they do want to see the ECB take action if the currency manages to rally up to 1.40.  Whether German exporters like it or not, the strength of the Euro will have an impact on their businesses.  Just as New Zealand reported a record trade deficit yesterday due to the strength of the kiwi, we expect the Eurozone to also begin to see deteriorating economic data, particularly as it pertains to trade.  Economic data released this morning confirmed that inflationary pressures are indeed subsiding with German import prices falling for the second month in a row.  French business confidence also came out softer, which is hardly a surprise given the recent trend of weaker economic data.  What was surprising was the uptick in the German IFO report on Thursday.  Businesses were more optimistic about the future which indicates that they expected a continued acceleration in economic activity.  In the week ahead, The Eurozone is also releasing a number of key data releases such as French and German unemployment, German retail sales, Eurozone CPI as well as regional PMI surveys.  Meanwhile the Swiss Franc has also staged an impressive rally today, confirming that carry trade liquidation is the main theme in the markets.  EUR/CHF has sold off for seven consecutive days, which is something that we have not seen since the beginning of the year and is particularly rare for a currency that usually range trades.  The week ahead also delivers a busy calendar for the tiny country, with the KoF leading indicators, CPI and GDP the most important releases.

British Pound
The weakness of the US dollar has pushed the British pound higher for the sixth straight trading day despite slightly weaker GDP data this morning.  Even though the quarterly growth rate remained unchanged at 0.7 percent, the annualized growth rate fell from 2.8 to 2.7 percent, led primarily by a decrease in consumer spending and a sharp drop in exports.  It seems that the strength of the British pound may also be catching up to the economy.  However unlike the Eurozone, the UK is less export dependent which means that the strength of its currency should have a smaller effect on the economy.  There are only a handful of releases for the UK next week, most of which are housing related.

Japanese Yen
The Japanese Yen is now trading on the 115 handle against the US dollar, which is something that we have not seen since the beginning of September.  The fact that the Japanese Yen actually sold off against every other currency indicates that the liquidation is primarily out of dollar based carry trades.  There are a number of speeches by Bank of Japan officials next week that can decide whether we will see a near term bottom in USD/JPY.  If Fukui and Noda reiterate the comments made by BoJ member Fukuma overnight, then we could see support come into the currency pair.  Fukuma said that there is no preset timing with regards to monetary policy.  The BoJ is continuing to play this game of giving the market a little and then taking it all back, which hurts their credibility.

Commodity Currencies (CAD, AUD, NZD)
The commodity currencies are also stronger as commodity prices tick higher.  The $10 rise in gold is particularly beneficial for the Australian dollar while the possibility of tax cuts suggested by Canadaââ,¬â"¢s Finance Minister last night has helped to cause a massive rally in the Canadian dollar.  Even though the trade deficit in New Zealand hit a horridly new record high, the rise in the other commodity currencies has pushed the Kiwi higher as well.  The main economic releases from the commodity bloc next week will be trade data from Australia and Canada along with Canadaââ,¬â"¢s GDP and employment reports.

Kathy Lien is the Chief Currency Strategist at FXCM.