The U.S. dollar is trading higher against all of the major currencies this morning and the disappointment in U.S. data suggests that risk aversion continues to drive currency flows. However USD/JPY has been on a tear and if the anxiety level is really elevated, it would not be aiming for its 7-month highs. Concerns about the Fiscal Cliff remain in the background but no new headlines are expected because nothing official is scheduled outside of President Obama's visit to a manufacturing plant in Philadelphia. The President will repeat his view that Bush era tax cuts need to be extended for low and middle-income households and allowed to expire on the wealthy.

USD/JPY was completely unfazed by today's weaker U.S. data. Personal income and personal spending fell short of expectations with incomes stagnating and spending falling by 0.2%. While it may be somewhat healthy to see spending decline when incomes fall, today's data shows that consumers are getting tapped out. Record breaking Black Friday and Cyber Monday suggests that Americans continue to spend beyond their means. As a result, the momentum on the 2 biggest shopping days of the year may not be sustained throughout the holiday season. The only way for retailers to keep the momentum going is to keep sales coming. Inflationary pressures also declined according to the PCE deflator and the personal savings rate increased from 3.3% to 3.4%.

The only explanation for the rally in USD/JPY is positioning because Japanese data actually surprised to the upside last night which should have been positive for USD/JPY. Household spending fell less than expected and industrial production rose at its highest level in 10 months. LDP leader Shinzo Abe also toned down his stance by saying that "I won't comment on the [monetary policy] methods if I become prime minister." This should have pushed the Yen higher but instead the currency traded sharply lower against the U.S. dollar.

So what's behind USD/JPY's rally? Investors may finally be recognizing the decline in 10-year JGB yields, which fell to another 9 month low last night. Traders probably took advantage of the recent pullback in USD/JPY to reset Yen shorts ahead of the election battle in December with some additional impact from month end flows.