By DailyFXUS Dollar - Just as we have promised, the combination of Ben Bernanke's semi-annual testimony on monetary policy and the TIC data delivered a...

... great deal of market volatility.

The dollar first sold off following weaker economic data. The $60
billion magic number that we were looking for in the net foreign purchases or TIC
report was actually breached, causing a state of alarm as foreigners limited their
purchases of dollar denominated securities to $56.6 billion, which was far less than
the market's $76.2 billion forecast and short of the $65.7 billion trade deficit for
the month of December. Industrial production also contracted unexpectedly by 0.2
percent last month as warmer weather decreased the need for utility usage while
mortgage applications took another nose dive, falling 7.3 percent after a 1.2
percent drop the previous week. Overall, applications have fallen 11 out of the
past 16 months. The only piece of good data that came out today was the Empire
State manufacturing survey, which increased modestly from 20.1 to 20.3 * the market
had actually expected the index to dip. However, the dollar's losses were
completely erased when Ben Bernanke began speaking. It was very interesting to
watch the new Fed Chairman tread carefully as some members of the House could not
refrain themselves from pushing for some straight answers, especially since it is
the first time in 20 years that they have seen a new face in the hot seat. It was
actually quite refreshing to hear some straightforward and easy to understand
comments from the Fed Chairman. Overall the questions and answer session went rather
respectfully. Bernanke said that "some" more rate hikes may be needed. The word
"some" is usually defined as more than one, so we assume that Bernanke intends to
proceed with a rate hike in March and May. He also felt that even though inflation
was well contained, consumer spending could continue to fuel growth in the economy,
which would ultimately lead to higher inflation and if that happens, more rate hikes
may be needed. In terms of the housing market, Bernanke acknowledged that it poses
a risk to growth, but like many, he felt that a cool down is more likely than a
collapse. Overall, there were no surprises and the market got what it was looking
for, which is a clearer outlook on interest rates. However, Bernanke's time in the
limelight this week is not over yet. He is slated to speak again to the Senate
tomorrow, and as usual, the question and answer session will be the most
interesting.

Euro - The Eurozone economic calendar was completely empty today with only the
Italian Current Account balance scheduled for release. According to the report,
Italy's current account deficit shrank from *EUR2.15 billion to *EUR1.98 billion in
December. With no distractions, it is hardly surprising that the EUR/USD moved
purely on dollar fundamentals. Looking at the headlines in the Financial Times
"Europe" section, we see nothing but bad news from "Fears for Spanish growth as
soaring deficit hits EUR61 billion" to "Bird flu prompts EU to ban untreated
feathers" and "Recovery hopes in Eurozone hit by German data." Yet, don't let the
press' doomsday scenario throw you off as the European Central Bank is still on path
to raise interest rates by a quarter of a point in March. We have mentioned
repeatedly that the weakness in the Euro, particularly now that we are trading below
1.1900 will be extremely stimulative for the Eurozone economy. This means that
economic data is set to improve and that is what the ECB is considering when talking
up rates.

British Pound - Aside from the US, developments in the UK was the other hot topic in
the markets today. To everyone's surprise, the Bank of England was a tad more
optimistic as they increased their forecasts for GDP growth. They still think that
inflation will remain near their 2 percent target and acknowledged that they were
unsure about how energy prices will impact inflation. However, after seeing
yesterday's weak inflation numbers, particularly the drop below the BoE's target for
annualized inflation, some traders had expected the BoE to be a bit dovish. The
more neutral report on the other hand makes the outlook for a rate cut in the near
future murkier, which has given some sterling bears a reason to square positions.

Japanese Yen - Optimistic comments from Ben Bernanke has helped the dollar rally
against the Japanese Yen after three days of back to back losses. Adding even more
confusion to the clash on Japanese interest rates, LDP Chief Nakagawa said that the
decision to end quantitative easing is up to the BoJ. Data out of Japan continues to
be positive with the leading economic index increasing to 81.8 percent, above
expectations of 80.9 percent, after a large increase in November to 80 percent from
54.5 percent. The index, which measures consumer confidence and other indicators,
has been above 50 percent for four consecutive months now, signaling faster growth
in three to six months. Released simultaneously was the coincident index, which
measures current economic conditions; that index checked in at 100% as expected.
January machine tool orders released an hour later suggests a pickup in business
investment in machinery, checking in at 5.4 percent year-over-year versus 5.0
percent in December. Overall, economic news out of Japan overnight was positive,
but unfortunately not enough to satisfy Yen bulls. Meanwhile there is a fascinating
observation made by our friend Andrew Busch at the Bank of Montreal. He said that
according to Bloomberg, Treasury Undersecretary Tim Adams "has asked strategists,
investors and academics to assess the likely reaction of financial markets in the
event the department cites China in its semiannual report on exchange rates," in
April. Our questions is, why would the Administration be conducting such a test if
they did were not seriously considering this possibility?


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX

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