Talking Points

  • Japanese Yen: Falls Back To Support at 91.00
  • Pound: Trade Deficit Narrows On Weaker Pound
  • Euro: Sunk By Expected Russian Delay Of Debt Payments
  • US Dollar: Geithner, Bernanke To Testify While Senate Votes

Euro Rebounds As Markets Focus On Geithner Testimony and U.S. Senate Vote

The Euro has started to find support after its freefall on the back of speculation that European banks will take losses from Russian loans. There have been reports that Russian is expected to request postponement of some $400 billion in private sector debt. However, denial of the story by the Russian Bank Association has helped the Euro find support ahead of 1.2800 bouncing back above 1.2970. Meanwhile, the fundamental data from the region continued to signal that the region would sink deeper into a recession as French and Italian industrial production contracted further. French activity fell –1.8% in December, which was the fifth straight monthly decline. In Italy industrial production had fell 2.5% dragging the annualized decline to 14.3%, which was the highest since record keeping began in 1991.

The troubles in Russia demonstrates that despite the fact that the Eastern European emerging markets aren't part of the Euro-zone, there economies are ultimately tied to the region and their troubles can filter through to the developed nations. Therefore, we may see the ECB need to lower interest rates further and take additional methods in order to avoid a deeper recession. Indeed, committee member Axel Weber stated that central banks shouldn't refrain from making aggressive rate cuts in order to stem the crisis. He is now joining member Athanasios Orphanides who has called for a zero interest rate policy. Therefore, we may see interets rate expectations lower, which could continue to weigh on the Euro. However, if the expected bailout plans from the U.S. government spark risk appetite then the single currency could continue to find support. The 20-day SAM remains a key level at 1.3112 after the Euro/dollar failed there overnight.

The Pound has given back some of its gains after it found resistance at 1.5000. The U.K. visible trade deficit narrowed more than expected in December, to £7.37 bln from £8.11 bln in November. A 0.3% rise in exports may signal that the U.K. economy is finally starting to benefit from the Pound's depreciation, which was forecasted by the BoE. This will strengthen the case for the central bank to keep interest rates on hold as the assess the impact of their past actions.

Traders during the U.S. session will be focusing on the upcoming testimony from U.S. Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke in addition to the Senate voting on the fiscal stimulus plan. The Treasury Secretary is expected to outline the details of the spending of the remaining $350 billion TARP funds, which is expected to include the involvement of private firms to help buy the toxic assets. This signals that the bad bank idea is being changed which has made investors uneasy as they felt the government's removal of the troubled assets would bring an ultimate end to the subprime crisis. Meanwhile, the Fed Chairman will give more details of the central banks efforts to loosen credit markets through off balance sheet maneuvers. The combined testimony may help ease current fears, which could restore recent risk appetite and weigh on the dollar. However, if the comments add to the growing concerns that there is still significant fallout ahead from the current banking crisis. The Senate vote today could be the main driver of price action if the government aide package is passed, which could lead to a demand for higher yielding assets and dollar weakness.