Talking Points

• US Dollar Little Changed Overnight Despite Robust Asian Stock Gains
• Euro Debt Fears Linger on Elusive Greek PSI Deal, Upcoming Bond Sales
• Spotlight on Bernanke Testimony as Traders Look for New QE3 Clues

Currency markets consolidated in overnight trade, with the US Dollar (ticker: USDollar) little changed against most of its leading counterparts (the Australian Dollar was a sole exception, spiking briefly higher following a supportive set of trade figures). The standstill contrasted with buoyant performance across Asian stock exchanges, where shares rose 1.2 percent on average as worries about slowing global economic growth receded after data released over the preceding 24 hours showed manufacturing activity in China, Europe and the US was stronger than expected in January. The disparity suggests the rally on Asian bourses amounted to little more than a catch-up move to price in developments that had already made their way into exchange rates by the close of North American trade, with FX traders already looking ahead to lingering headwinds emanating from the Europe.

On that front, there appear to be ample reasons for concern. An accord on private-sector involvement (PSI) in the second Greek bailout – without which the debt-strapped country will not receive a tranche funding needed to offset over €14 billion in bond redemptions that could push it into default as soon as early March – remains stubbornly elusive. While EU officials and representatives of the Institute of International Finance (IIF) – the body negotiating on behalf of Greece’s creditors – continue to talk up progress, plenty of deadlines have already come and gone with nothing tangible to show for them, which is likely to invariably weigh on confidence. Against this backdrop, France and Spain will hold bond auctions today, with traders keeping a close eye on average yield and bid-to-cover readings for a measure of solvency risk in the markets. The economic calendar may serve as another driver of renewed downward pressure on the Euro with Producer Price Index figures expected to see wholesale inflation drop to the lowest in 14 months, hinting at downward pressure on headline CPI in the pipeline and stoking ECB rate cut bets.

Later in the session, the spotlight turns to Federal Reserve Chairman Ben Bernanke as he testifies before the House of Representatives’ Budget Committee on the state of the US economy. Given last week’s overtly dovish FOMC policy announcement, it seems reasonable to expect more of the same from the Fed chief’s remarks. With that in mind, the testimony’s market-moving potential will likely reflect the degree to which it advances the probability of additional quantitative easing in the months ahead. Put simply, if Bernanke appears to sound more dovish than was already priced in, risk appetite is likely to benefit to the detriment of the greenback amid hopes that the central bank will do its utmost to pour fuel onto the cautiously improving US recovery. Alternatively, a re-statement of the status quo will probably pass with little fanfare, refocusing investors on the closely-watched US employment report due on Friday.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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