US Dollar
Dollar traders had two events in mind when coming to their terminals Tuesday: the October trade balance and the FOMC rate decision. Starting the day off, the deficit hit the wires with a surprise. Already projected to contract on the month, the long standing shortfall narrowed 8.4 percent from Septemberâ�,��"�s figure to $58.9 billion. While the new level was making headlines at a 14-month low, the real interest in the report was that it was the biggest improvement in the trade account in five years. Interestingly enough, this same volatility underscored the bias in the underlying components. Though exports grew to a record $123.6 billion, the expansion was modest at 0.2 percent.  Instead, the bulk of the change came on the part of imports; and specifically, the petroleum group. Overall, imports marked a 2.7 percent drop, the biggest since December of 2001. However, it was a $3.9 billion drop in the energy groupâ�,��"�s deficit that leveraged the shocking headline report. Elsewhere, trade was business as usual. Imported consumer goods were still on the rise, while the shortfall with China reached a new record. Indeed, a $24.4 billion capital outflow to China won the country the distinction of the United States second largest trade partner, after booting Mexico down a rung. This will likely be another statistic Treasury Secretary Henry Paulson will bring up in his meeting with leaders across the Pacific. Paulson, along with a half dozen political heavy weights including Fed Chairman Ben Bernanke, have made the trip to speak on Washingtonâ�,��"�s concerns over the undervalued yuan, lack of international intellectual-property protection and the limited access of foreign access into Chinese capital markets. Back in the States, the Fedâ�,��"�s Policy Board decided to pass on changing the Federal Funds rate, as expected. Even the brief statement that followed the decision could not rally momentum behind the dollar either way. Nearly all of the text from the October announcement was revived with few alterations to bring into view a rate cut. The one change that was picked up was the use of â�,��"substantialâ�,� to modify the cooling housing market.

Euro and Swiss Franc
Both the Euro and Swiss Franc strengthened for the second consecutive day, with strength against the US dollar and Japanese Yen driving both continental currencies. Though there will be no new Swiss economic data ahead of Thursdayâ�,��"�s SNB monetary policy meeting, traders have already been boosting the currency in expectation of a quarter percentage point rate hike. For the Euro, the morningâ�,��"�s stronger than expected German ZEW Investor Confidence report boosted outlook on Europeâ�,��"�s largest economy and for broader Eurozone growth. Business leaders expressed improved confidence for the first time in 7 months, as stronger profits have assuaged fears of higher borrowing costs and an imminent Value Added Tax (VAT) increase. Though the EURUSD actually lost ground through later morning trade, renewed bids on the EURJPY pair underpinned Euro strength and had it nearly flat ahead of the FOMC release. Price charts will show that the rest was history, with both the EUR and the CHF posting strong gains against the US dollar.

British Pound
The Pound forced its strongest rally since the first of the month, driving it to fresh 8-year highs against the Japanese Yen. Strong demand for GBPJPY longs initially brought cross-currency upward pressure for the GBPUSD, with the later anti-USD move only compounding earlier gains. Indeed, with this morningâ�,��"�s inflationary data highlighting price risks for the broader UK economy, many speculators re-initiated bets on Pound strength through further Bank of England interest rate hikes. With Consumer Price Index growth at its highest levels in over 9 years, synthetic interest rate forwards now reflect an approximately 50 percent chance that BoE rates will reach 5.50 percent through the second quarter of 2007. Of course, it may be too early to tell that the Monetary Policy Committee will opt for a further 50bp of tightening, with first quarter CPI growth to prove critical to wage negotiations and inflation expectations. Regardless, a strongly bullish price reversal in the GBPUSD could see the currency pair continue higher through the short term.

Japanese Yen
Other than its small gains against the broadly week US dollar, the Yen saw fairly large declines against the majors on soft inflation data and subsequently falling bond yields. This was of course most pronounced against the EUR and the GBP, with the GBJPY pair setting fresh 8-year highs while the EURJPY reached new record levels. Last nightâ�,��"�s Corporate Goods Price Index report showed that prices rose at their slowest in seven months, as falling energy costs eased inflationary pressures on the worldâ�,��"�s second-largest economy. The data only served to increase speculation of steady Bank of Japan lending rates through the end of the year, with Japanese bond yields posting their largest 2-day drop since August. It is significant to note that futures traders continue to price in a 25 basis point rate hike through the month of December. This scenario seems increasingly unlikely, but such an outcome would nonetheless depend heavily on the upcoming BoJ Tankan survey of business investment. As we said in yesterdayâ�,��"�s report, a negative outcome would effectively rule out a December hike, with analysts and traders to shift predictions to the first quarter of 2007 at the earliest.

Commodity Currencies (CAD, AUD, NZD)
Amongst the commodity currencies, economic calendars filled out a little for the day. From Australiaâ�,��"�s docket a business confidence survey was backed up by comments made by RBA Governor Glenn Stevens. The NAB Business Survey dropped to its lowest level in eight months in November as the cumulative effects of three rate hikes through 2006 cut into expectations for domestic demand.  Governor Stevens caused few waves in the markets as he said his view on monetary policy and the economy had not changed, and proceeded to speak on private equity as planned. A quarter of the way around the world, the Canadian dollar was traded off the October trade report.  As expected, the surplus shrank to C$3.8 billion, its lowest level in three months, as falling energy prices helped push exports 1.7 percent lower.  Specifically interesting in the statistics, the surplus with the US alone fell to its weakest in two years.

Kathy Lien is the Chief Currency Strategist at FXCM.