The NY session brought about a rollercoaster ride in the currency market, on the heels of what was a rather lackluster overnight session. Bernanke came out on the dovish side but was perhaps a little less forceful than the market had anticipated in terms of the outlook for the Fed target rate. It was actually more of the same as the Chairman basically said that the Fed target rate will remain low for an extended period of time. He also reaffirmed that the recent increase in the discount window rate was not a shift in policy. The bid tone to equities on Bernanke's confirmation that the punchbowl will indeed remain in place initially helped EUR/USD stretch gains towards 1.3625/30. In the end, this would prove but another in a long list of short-squeezes as the pair promptly collapsed nearly -100 pips into a NY close by the 1.3535 zone. The rally in the equity space did help gold (XAU/USD) carve out an intraday bottom at $1090 and the precious metal should now see better momentum buyers on a break above the $1098 zone. This also kept the so-called commodity currencies supported despite what was an overall US dollar positive tone.

The rally in risk was despite a dreadful new home sales number out of the US. Sales collapsed more than -11% in January to a record low 309K annual run-rate (data going back to 1963). Some in the market attributed the drop to harsh winter weather conditions, mainly in the Northeast, but the reality is that the data this week have been less than constructive. With Bernanke now behind us (his Senate testimony tomorrow will likely be postponed due to more snow) the focus is on what the month-end flows will look like at the end of the week. Our in-house model suggests EUR buying and USD selling is in the offing as the US witnessed a large increase in equity market capitalization while Europe was down in size. While other factors can outweigh the portfolio rebalancing flows, this is definitely something to keep in mind as we get closer. However, our long-term view remains USD bullish and thus any setback here should be viewed as a buying opportunity.