US Dollar
After having rallied for most of last week, the US dollar started its final week before the market swings into full holiday mode on a softer footing.  The combination of a record high current account deficit and a drop in the NAHB housing market index tempted traders to take profit on long dollar positions even though the data was not entirely dollar negative.  The current account deficit ballooned to -$225.6 billion from a downwardly revised -$217.1 billion, which was slightly more than the market expected and represents 6.7 percent of GDP.  However after last weekââ,¬â"¢s surprise drop in the trade deficit and rise in net foreign purchases of US securities, the significance of the current account deficitââ,¬â"¢s rise is eroded.  Furthermore, the details of the current account number also reveal that foreign central banks picked up their purchases of US Treasuries last quarter.  The deterioration actually came from a large rise in commodity prices and drop in the balance of income, which is expected to be offset by income growth in the coming quarters. As for the NAHB homebuildersââ,¬â"¢ index, even though the sentiment measure dropped from 33 to 32 in the month of November, expectations for future sales rose to 48 from 45.  Therefore even though todayââ,¬â"¢s data was weak on a headline level, the details had a more optimistic take on things.  Looking ahead, we could see a bit more dollar bearishness in the next 24 hours as producer prices and housing market data are released.  A rebound is expected in PPI after a sharp drop in October, but after the flat consumer price reading last week, the rebound could be smaller than the market is currently anticipating.  However for the time being, consumer spending is still holding strong as indicated by last weekââ,¬â"¢s retail sales number.  This suggests that we are still in soft landing mode which makes it unlikely that we will see fresh yearly highs in the EUR/USD before the yearââ,¬â"¢s end. 

Euro and Swiss Franc
The combination of a stronger Eurozone trade surplus in the month of October and weaker US data has helped the EUR/USD rally for the first time in 3 trading days.  The German IFO report will be the key European release tomorrow as it will determine whether the bounce in the EUR/USD has more room to run.  Business confidence is predicted to hold steady at 106.8, but the risk is certainly tilted to the downside after the European Central Bank hiked rates in the month of December and the Euro shot to a yearly high of 1.3370.  The strain from both of these short term milestones should hurt the confidence of businesses and if this is truly the case, the EUR/USD may head for a test of 1.30 before the US numbers are released a few hours later.  Over in Switzerland, industrial production dropped a less than expected 0.5 percent in the third quarter.  There was barely any reaction in the Swiss Franc however as the currency sold off against both the Euro and US dollar.  The Swiss calendar is light this week with barely any further data aside from the November trade balance on Thursday. The Swiss National Bank continues to believe that the economy is doing well, which is the primary reason why they are holding onto their mildly hawkish stance. 

British Pound
With no economic data released today, the British pound was weak across the board today with the currency falling for the fourth straight day against the US dollar and for the first time in at least three days against the Euro and Japanese Yen.  Even though most of last weekââ,¬â"¢s data surprised to the upside and confirmed the overall strength of the economy, the sheer magnitude of the prior rise in the GBP/USD has also made it one of the most vulnerable to dollar strength.  Starting tomorrow, we are expecting a lot of UK data including the minutes from the most recent monetary policy meeting, housing market figures and GDP.  All of it should continue to be more positive than negative for the British pound.  The only problem is that according to the IMM futures data, long British pound positions have hit extreme levels as of early last week.  This means that the number of buyers left in the market may be limited. 

Japanese Yen
The Japanese Yen strengthened against every major currency except for the Euro today as stability returns to the region with North Korea resuming six nation talks in Beijing to see if they would be willing to dismantle their nuclear program.  The Bank of Japan is set to announce their monetary policy decision tonight.  Interest rates are expected to be left unchanged at 0.25 percent, putting the marketââ,¬â"¢s main focus on BoJ Governor Fukuiââ,¬â"¢s post meeting comments as well as the central bankââ,¬â"¢s monthly report.  Hawkish comments could help the currency extend its rally as the market prices in the possibility of a Q1 interest rate hike by the central bank.  The recent weakness of the currency should help pave way for stronger growth and give the government more confidence that the Japanese economy could handle another rate hike. 

Commodity Currencies (CAD, AUD, NZD)
The commodity currencies behaved very differently today with the Australian dollar weakening, the Canadian dollar strengthening and the New Zealand dollar remaining mostly unchanged.  Starting with Australia, home sales dropped 5.3 percent in the month of November with sales of private detached homes plummeting to the lowest level since December 2000.  Leading indicators are due for release tonight along with job vacancies.  Given the recent trend of data, we could see more Aussie negative news.  Canada reported a surprisingly strong rise in leading indicators during the month of November, with eight out of the ten components improving, which helped to rally the currency.  Traders completely shrugged off the weaker International Securities Transactions which suggested that foreigners were pulling money out of Canada.  Inflation data is due for release tomorrow with a rebound expected thanks to a recovery in oil prices and a prior drop in October.  New Zealand business confidence improved in the month of December, but the key will be tomorrowââ,¬â"¢s half-year economic and fiscal update along with the Budget Policy Statement.

Kathy Lien is the Chief Currency Strategist at FXCM.